Forgotten Pharma ETFs May Bounce Back with Swine Flu Fears

Last Thursday, the World Health Organization (WHO) labeled the swine flu with the fear-provoking word, "pandemic." It's the first time that the label has been attached to a strain in more than 40 years.

The swine (pig) flu has been diagnosed in 30,000 cases worldwide, resulting in 144 deaths. It seems to have surpassed its predecessor, avian (bird) flu, in both coverage, concern and incidence.

(Quick aside... fans of "It's Always Sunny In Philadelphia" probably can't resist imitating Danny DeVito. "We can cover a major pandemic... bird flu, fish flu.")

While there's nothing laughable about a virus that can't be contained yet, there are potential financial implications. For instance, one of the worst performing sectors in 2009 has been pharmaceuticals. In spite of the sector representing cash-rich mega companies with actual earnings growth, investors have avoided the former safe haven like the plague.

Yet guess which area is sporting the best gains from Thursday through mid-day, Friday, 6/12/09? Pharmaceutical HOLDRS (PPH), iShares Global Health Care (IXJ) and SPDR Pharmaceuticals (XPH) are handily outhustling the broader market.

In a bit of a twist, global health care is performing nearly as well as big pharma. That's because the iShares S&P Global Healthcare (IXJ) has more international exposure to the worldwide "pandemic." Even though IXJ does not merely hold the drug providers, IXJ does hold international pharmaceutical leaders in the vaccine business (e.g., Novartis).

On the flip side, some investments may be adversely hit by the recent news. Consider the DJ Livestock ETN (COW). As if its performance hadn't already been beaten down in 2009 by a 1/3 exposure to hog futures, it may continue to struggle if "swine flu" fears persist.

Full Disclosure: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. The company may hold positions in the ETFs, mutual funds and/or index funds mentioned above.

Comments

[Everyday Fi...:]

I think the whole swine flu issue is another opportunity where perception and fear have diverged from fundamentals so much that investors willing to wait out the churn from newsbites and "shocking" headlines can reap great returns.

The article highlighted the DJ Livestock ETN. This is probably a good opportunity to pick up soon when a reversion to the mean is anticipated. Aside from the fact that as the economy recovers, meat will be back in force on the American plate, regarding swine flu fears, the science dictates that swine flu is not transmitted by eating pork. The fact that many countries have conducted full scale slaughter of all pigs and also, banned exports from the US demonstrates politics over science. Eventually, the market catches up to poor policy and exports/consumption will revert to prior levels.

On the pharma/biotech side, the vast majority of the companies that run up on swine flu prospects will never see a dime in revenue related to their efforts, even if the flu comes back in full force this season. While there are over 20 companies that claim to have a stake in the issue, you'll probably only see a couple biotechs and a couple pharmas with any meaningful impact since ultimately, the govt won't sponsor 19 different vaccine strains and there are only a few large pharmas with the capacity to produce in meaningful volumes. Then, the large pharmas derive such a small portion of profits from low-margin vaccines, that whatever move you've seen to date is probably about it, except for perhaps, a hype trade if the strain becomes more virulent in the fall. But, as a fundamental long-term change in business prospects, not a good "long term investment" IMO.

Jun 15 09:42 AM