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To Healthcare, With Leverage

ETF Professor

The Affordable Care Act, also known as Obamacare, has its critics. It also has its supporters and it is not a stretch to say some of those supporters are investors in healthcare stocks and exchange traded funds.

Gone are the days when the healthcare sector, currently the third-largest sector weight in the S&P 500, was viewed as a stodgy. In the case of the Health Care Select Sector SPDR (NYSE: XLV), the largest healthcare ETF by assets, “stodgy” does not produce three-year returns of 108.1 percent, topping the S&P 500 by 4,600 basis points in the process.

While XLV is still home to plenty of blue-chip pharmaceuticals stocks, this is an ETF with an almost 22 percent weight to biotech stocks and a 13.5 percent allocation to healthcare equipment manufacturers. But for the investor that craves a little more action from their healthcare ETFs, there is the Direxion Daily Healthcare Bull 3x Shares (NYSE: CURE).

“Traditionally considered defensive stocks, the health-care sector has been on what some would say is a tear. Normally, this sector reaches peaks during market down cycles like in 2001 or 2009, because investors buy defensive stocks while selling cyclical ones,” said Direxion, CURE's issuer, in a recent note

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CURE attempts to deliver three times the daily performance of the Health Care Select Sector Index, XLV's underlying index. While triple-leveraged ETFs are not intended to be buy-and-hold instruments and some over longer holding periods and wildly deviate from their stated objectives, it is worth noting CURE is up 30 percent this year, nearly triple the 11 percent returned by XLV.

Combine Obamacare with the healthcare sector's minimal vulnerability to the stronger U.S. dollar and an aging U.S. population and CURE could continue to make for a useful tool in the tactical trader's toolbox.

“But the bulls think healthcare stocks will be just fine, even when the Fed finally raises interest rates," according to Direxion. "Health care firms have a low sensitivity to the dollar because they are work in mainly domestic markets, with minimum foreign sales. And some investors believe that as the economy improves, companies will expand payrolls, increasing the number of people who enroll in health care coverage, expanding the premium base. Furthermore, most agree that an increase in demand for treatment for chronic conditions for an aging population is a foregone conclusion, and the demographics favor health care in the long term."

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