New Pharma ETF PILL : What Investors Need To Know

The pharma sector has been a moderate performer this year with the NYSE ARCA Pharmaceutical Index adding about 10.4% so far this year (as of Nov 24, 2017), underperforming the S&P 500 (up 15.3%) and the Nasdaq (26.9%).

But this underperformance did not eat into the issuer’s enthusiasm. Direxion recently launched a triple-leverage pharmaceutical fund, in the name of Daily Pharmaceutical & Medical Bull 3X Shares PILL.

Let’s delve a little deeper and find out what caused the issuer to shoot a leveraged fund on this apparently-underperforming (at the current level) space.

Inside PILL

The fund looks to track 300% of the performance of the Dynamic Pharmaceutical Intellidex Index. The underlying index comprises common shares of companies that are into research and development, manufacturing and distribution of pharmaceuticals and drugs of all types.

Abbvie Ord Shs (6.13%), Bristol-Myers Squibb Ord (5.19%) and Pfizer (NYSE:PFE) Ord (5.17%) are the top three holdings of the fund. Pharmaceutical stocks occupy about 66.8% of the portfolio while biotechnology stocks account for the rest. The fund charges 1.13% annually.

How Does It Fit in a Portfolio?

Price gouging has been nagging the space. Though the threat has subsided a lot in the Trump era after a more vocal protest against it by his democratic opponent Hillary Clinton during the campaign days, the sector still faces risks of price controversies. Still, the long-term prospects of the space appear bright.

However, as we progress toward the close of 2017, the pharma sector continues to perform well on breakthrough U.S. Food and Drug Administration (FDA) approvals, success in the immune-oncology field, and mergers and acquisitions (read: Should You Keep Your Portfolio Healthy with Biotech ETFs?).

In the third quarter of 2017, biotech stock Vertex Pharmaceuticals (NASDAQ:VRTX) received a new FDA approval for cystic fibrosis drug, Kalydeco. In early September, FDA approved Novartis AG's breakthrough gene transfer treatment.

Gilead Sciences (NASDAQ:GILD) announced the buyout of Kite Pharma KITE for $11.9 billion in late August to foray into the trending CAR-T Therapy space. The FDA's approval of Yescarta (axicabtagene ciloleucel), the latter's CAR-T therapy candidate is expected to drive Gilead Sciences (read: Biotech ETFs Soar on Gilead-Kite Deal).

Overall, the fund is a good choice for those seeking to bet primarily on large-cap stocks in the pharmaceuticals sector. These are large, stable companies that generate solid cash flow and add stability to the portfolio. Healthcare is one of the most defensive sectors in the U.S. markets. This sector is expected to continue to benefit from increased M&A activities, new drug approvals and innovations.

Competition

Investors intending to target the space with lesser risk appetite may find the non-leverage ETF PowerShares Dynamic Pharmaceuticals Portfolio (WA:PJP) more appealing.In the leveraged ETF space, the newly launched fund may face stiff competition from Direxion Daily Healthcare Bull 3x Shares (AS:CURE) and Direxion Daily S&P Biotech Bull 3x Shares LABU and ProShares UltraPro Nasdaq Biotechnology UBIO (see all Leveraged Equity ETFs here).

While CURE gives 300% of the performance of the Healthcare Select Sector Index, LABU tracks 300% of the performance of the S&P Biotechnology Select Industry Index and UBIO offers daily investment results that correspond to three times the daily performance of the NASDAQ Biotechnology Index.

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