ETF Update: Pharma ETFs, Commodity ETFs, Carry Trade

Success Of Cancer Vaccines Could Have Pharma ETFs Feeling Good

With drug makers making a push for cervical cancer vaccination, the industry is quickly growing, and certain ETFs can capture this growth.

In a New York Times article, Elisabeth Rosenthal examines how over the past two years, cervical cancer has gone from an obscure disease mostly in poor nations to a great concern in many western countries.

Two vaccines have been approved and released over the past two years. Over this period, tens of millions of girls throughout the United States and Europe have been vaccinated against cervical cancer. In many countries, the vaccines were recommended for universal use among females between the ages of 11 and 26. The vaccines include Gardasil, from Merck (MRK), and Cervarix, a GlaxoSmithKline (GSK) product.

As this market grows at an alarming rate, the vaccines have appealed to not only potential recipients and humanitarians, but politicians as well. The remarkably quick transition of the vaccines in the United States and Europe shows the success of what manufacturers call education and critics call marketing.

As investment in these vaccines increases, award-winning advertising has been utilized to promote these innovations. The impact has been so large, 41 states have passed or have begun considering legislation on cervical cancer. Virginia has made the shots mandatory for girls before entering school, which takes effect in 2009.

As even the critics of the marketing admit to the benefits of the vaccines, many questions remain unanswered about both treatments. Questions pertaining to the length of immunity and potential side effects have nagged the vaccines.

However, 16 million doses have already been distributed domestically by Merck. This left both the FDA and CDC saying that “by chance alone some serious adverse effects and deaths” will occur because of the large population these 16 million doses were administered to.

Even though some questions remain pertaining to the long-term effects and immunity of the vaccines, the market for these treatments is vast and potentially very lucrative. Some ETFs that could weigh in on this action include:

• HealthShares Cancer (HHK), is up 1.5% year-to-date with top holdings in Vertex Pharmaceuticals (VRTX), APP Pharmaceuticals, Fresenius, and Onyx Pharmaceuticals (ONXX). 
• Pharmaceutical HOLDRs (PPH), is down 9.8% year-to-date with top holdings in Abbott Laboratories (ABT), Johnson & Johnson (JNJ), Merck, and Pfizer (PFE).
• PowerShares Dynamic Pharmaceuticals (PJP), is up .06% year-to-date with top holdings in Genentech (DNA), Wyeth (WYE), Merck, and Johnson & Johnson.
• SPDR S&P Pharmaceuticals (XPH), is up 3.6% year-to-date with top holdings in Barr Pharmaceuticals (BRL), Forest Laboratories (FRX), King Pharmaceuticals, and Merck.
• iShares Dow Jones US Pharmaceuticals (IHE), is down 1.3% year-to-date with top holdings in Pfizer, Merck, Johnson & Johnson, and Abbott Laboratories.

When It Comes to Taxes, Commodity ETFs Are a Different Breed

Now that commodities have come down from their recent highs, are you tempted to go in on a market dip with a focused ETF?

Commodity ETFs are popular, no doubt, especially given the bull run they’ve had this year, garnering nearly $20 billion in net inflows, reports Paulette Miniter for Smart Money, and Morgan Stanley analyst Paul Mazzilli says assets now stand at $30 billion.

ETFs such as United States Oil (USO) is the first pure oil play, with $1 billion in assets, and SPDR Gold Shares (GLD) took in an astounding $19 billion thus far. Most retail investors should understand, however, that the tax treatment for commodity funds is a little different than the usual.

While commodity ETFs do not hold actual stocks, they do own either the actual physical commodity itself, or a futures contract or a derivative. So, even if you do not sell the ETF, you will owe the government 60% of your gains taxed at 15% for long term and 40% of your gains at the going rate of your general income.

When you invest in the actual physical commodity with a fund such as iShares COMEX Gold Trust (IAU), the IRS taxes them as collectibles, earning them a higher long-term gain rate at 28%, not 15% charged to stocks.

If and when you decide to dip into the commodity ETF pool, just be aware of these facts and how taxes work when it comes to commodities, and consider them when making your decision.

The Carry Trade At Everyone’s Fingertips With An ETF

Institutional strategies are becoming more and more common for the individual investor, especially with the ETF explosion.

Take into account the carry trade: it is all about selling currencies at low interest rates and buying currencies with high interest rates, and then the investor benefits from the interest rate spread, reports Matthew Hougan for Index Universe.

PowerShares G10 Currency Harvest Fund (DBV) is an unleveraged ETF that invests in a steady pattern of long-term returns with low correlations to market fluctuations. Since its inception in September 2006, it’s up 8.2%. Year-to-date, it’s down 4.5%.

The index invests in U.S. dollars, euros, Japanese yen, Canadian dollars, Swiss franc, British pound, Australian dollars, New Zealand dollars, Norwegian krone, Swedish krona. The expense ratio is at 0.75%. The volatility is low in this ETF because the index takes long and short positions providing consistent and less volatile returns.

Throughout the year, the weightings of each commodity component in the index naturally changes, based on changes in the underlying futures prices.

Comments

[ksmithdc:]

I wouldn't bank on long term growth here.

2008 Aug 24 11:08 AM

[omooc:]

Good to know the different tax rates applied to various ETFs. Suggest you do one exclusively on this topic. Also, the phrase "earning 28% capital gain rate" is misleading.

2008 Aug 24 09:48 PM

[ikkyu:]

Greetings,

You have repeated Hougan's error. DBV is leveraged 2:1. The prospectus probably should be read by "professionals."

Cheers from Osaka,
John

2008 Aug 25 11:20 AM

[mitch52:]

"...over the past two years, cervical cancer has gone from an obscure disease mostly in poor nations to a great concern in many western countries."
Follow the money, just like chicken pox used to be an inconvenient childhood rite of passage that morphed into an evil spectre hounding society that must be dealt with. How? Vaccines of course. There are tons of accounts of bad reactions to Giardasil, but press on, there is enough money for everyone. It's trickle down at it's best, from the drug makers, to the lobbyists , to the politicians. Who cares if we are now shooting up our children with potentially 20 or 30 vaccines of dubious quality or effect.

2008 Dec 05 03:23 PM