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Direxion Plans Two Triple-Leveraged Biotech ETFs - ETF News And Commentary

Sweta Killa
Updated

Investing in biotech firms undoubtedly has gained immense popularity in recent years. Despite the meltdown early in 2014, biotech was the best performing sector last year and is continuing its strong performance this year too (read: 3 Biotech ETF Winners from 2014's Best Performing Sector).

In fact, the S&P Biotechnology Select Industry Index soared 47.3% over the trailing one-year period, easily crushing the S&P 500. Strong earnings growth, a merger and acquisition frenzy, the Affordable Care Act or Obamacare, and encouraging industry trends are fueling growth in the sector. However, failed trials, FDA concerns, and pricing issues have hit a number of companies in this sector lately, turning winners into losers overnight.

Given the high level of volatility and the prospect of big moves in the sector, Direxion, the second largest leader in the leverage and inverse ETF world, plans to launch a pair of ETFs targeting this growing sector by employing triple leverage.

Direxion Funds in Focus

The duo looks to give investors daily resetting exposure to the S&P Biotechnology Select Industry Index, with Direxion Daily S&P Biotech Bull 3X Shares ETF using 300% exposure, and Direxion Daily S&P Biotech Bear 3X Shares ETF delivering a -300% return (see: All the Health Care ETFs here).

The products create a leveraged long or short position by investing at least 80% of its assets in the underlying index through the use of swaps, options, future contracts and other financial instruments. The remaining 20% is invested in money market funds or short-term debt instruments, including U.S. government securities that have high quality credit profiles and terms-to-maturity of less than 397 days.  

The underlying benchmark for the pair is quite spread out across 85 securities. Both funds look to charge investors 95 basis points a year for this exposure.

How Do They Fit in a Portfolio?

Due to the daily resetting nature of these leveraged ETFs, the duo involves a great deal of risk when compared to traditional funds in the space and are hence not suitable for long-term bets. Rather, these should be utilized by high-risk tolerant traders seeking to play for the short term.

This is especially true given that investing through derivative instruments increases volatility. Further, the daily rebalancing — when combined with leverage — may make these products deviate significantly from the expected long-term performance figures.

Though biotech remains a high growth sector, the stocks appear overvalued at the current levels. And with growing economy and strengthening job conditions, investors could rush for riskier assets, making the biotech space less appealing for investors in the coming months. Further, any negative news on the drug approval and pricing issues might hamper the stock performance (read: 3 Biotech ETFs Crushing the Market in 2015).

Competition

There are several plain vanilla funds in the biotech space with First Trust NYSE Arca Biotechnology Index Fund (FBT) and SPDR S&P Biotech ETF (XBI) being the most popular. While both funds provide relatively equal exposure across a number of securities, FBT costs 25 bps more than XBI and has a higher AUM of $3.24 billion (read: Biotech ETFs Head to Head: XBIVs. FBT).

In the leveraged space, there is only one ETF currently on the market – ProShares Ultra Nasdaq Biotechnology ETF (BIB). It offers two times (2x or 200%) exposure to the daily performance of the Nasdaq Biotechnology Index. The fund has amassed $743.9 million in its asset base so far and charges 0.95% in expense ratio.

The proposed bull fund, if approved, would be the second alternative to play in the leveraged biotech market and could garner enough investor interest given the current bullish trends. However, in the inverse leveraged space, Direxion’s biotech bearish ETF seems to be the new product in the space and would get the first-mover advantage in case of any cloudy outlook and negative sentiments.

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SPDR-SP BIOTECH (XBI): ETF Research Reports
 
FT-AMEX BIOTEC (FBT): ETF Research Reports
 
PRO-ULT NDQ BIO (BIB): ETF Research Reports
 
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