Direxion Daily Healthcare Bull 3X Shares Provides Magnified Returns With A Healthcare Focus

Summary

• Direxion Daily Healthcare Bull 3X Shares is a triple leveraged bullish healthcare-focused index.
• The fund mainly invests in large companies in different healthcare subsectors.
• The fund has an elevated risk profile matched by superior return.
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Investing in leveraged ETFs is a high risk-return strategy and is not for the faint-hearted nor is it for those who have zero knowledge of the sector the ETF is invested in. But for those who understand sector-driven movements of individual stocks and are not afraid of derivatives and debt instruments, a highly leveraged ETF provides access to opportunities for solid gains. By its nature, sector-driven investment needs to be cyclic, so you are not going to want to hold on to such ETFs for the long haul. These are often mid-term plays, driven by mid-term market dynamics.

The pandemic, among a host of other factors, has made certain healthcare ETFs highly attractive. One such ETF is Direxion Daily Healthcare Bull 3X Shares (NYSE:NYSEARCA:CURE). CURE tracks the composition and activity of the Health Care Select Sector Index. After a long period of solid gains, the index has shown some signs of a depression, which may make it attractive. Constituents are mostly solid healthcare stocks with diverse business profiles and with mid to large market caps. CURE has a bullish approach to the sector, and its aim is to provide three times the performance of the benchmark index using derivatives and debt instruments.

What is interesting, though, is that the target is to achieve a magnified return on a single-day basis and not on a cumulative basis.

The Background

Some of the most important metrics which we may use for evaluating the potential of an ETF are its holdings and its target index. Direxion Daily Healthcare Bull 3X Shares seeks to replicate the Health Care Select Sector Index, which mainly consists of domestic companies engaged in the healthcare sector. While Direxion Daily Healthcare Bull 3X Shares may seem highly targeted as it is branded a healthcare sector fund, it is actually able to achieve diversification since its target index is invested in multiple sub-sectors of the segment.

Amongst the main sub-segments covered by the index are healthcare equipment and supplies, pharmaceuticals, healthcare providers and services, life sciences tools and services, healthcare technology and biotechnology. By investing in different sub-segments, the index and consequently the fund has a fairly diversified holding, reducing the risk profile. Overall, with Direxion Daily Healthcare Bull 3X Shares, investors derive the benefit of investing in different sub-segments of the industry.

So, let’s take a look at the diversified holding of Direxion Daily Healthcare Bull 3X Shares. The fund’s largest single holding is in Johnson & Johnson (JNJ) with 9.2 percent of the investment. The second-largest investment with 8.01 percent of the corpus is in United Health. Pfizer (PFE) holds third rank with 4.65 percent share.

Source: Company Website

The analysis of the above chart shows that fund is mainly aimed at high-quality, value-driven stocks. This implies that the fund may be suitable for investors looking for long-term growth with low risk profile. Further, the main constituent companies also have high market cap, making them more stable. So there’s a balance of mega-cap biopharma, healthcare plan providers, and device makers in the top ten holdings list. This is a good way to diversify even within a single sector.

The Fund Mechanics

Investing in passive ETFs may seem straightforward as the funds simply either directly replicate the actions of the benchmark index or a sample of their transactions. Either way, passive funds such as Direxion Daily Healthcare Bull 3X Shares have lower transactional volume and consequently lower fee structure. However, the interesting point about Direxion Daily Healthcare Bull 3X Shares is that it is a leveraged passive fund, which makes it stand apart in the crowd of plain vanilla sector-focused index funds.

The fund has reported its gross expense ratio at 1.04 percent which is on the higher side compared to its industry peers. Expense ratios are important since these eat into the net return available to the investors. However, the fund has provided consistent growth to justify its slightly higher expenses.

So, let’s demystify the workings of leveraged index funds and analyze how Direxion Daily Healthcare Bull 3X Shares is performing. First off, these kinds of leveraged funds are targeted towards tactical investors who are looking to benefit from short-term developments in the targeted sector. Since Direxion Daily Healthcare Bull 3X Shares is a triple leveraged bull fund, it means that it provides 300 percent risk and volatility vis-a-vis its underlying index.

The two main components of an ETF are its NAV and its market price. Its Net Assets Value growth rate lets the investors know the performance of the fund over a period of time. However, if investors are looking to trade their fund, then the key metric is its market value. At any point of time, the market value may be below or above its NAV. In such cases, the fund is said to be trading on discount or on premium, respectively. So, while as an investor, you should look at NAV, you should also pay attention to the market price to determine specific entry and exit points.

The Performance

As we had talked earlier about key metrics, let’s have a look at NAV growth for the fund. In the past one year, the fund has provided a whopping 91.84 percent growth on its NAV while its underlying index grew 27.92 percent growth during the same time. The fund largely benefited from positive movements in the healthcare sector. However, its growth in the preceding time periods had been equally impressive. For a 3-year time frame, the fund delivered annualized growth of 32.65 percent. Since its inception, the annualized return delivered by the fund stands at 36.09 percent. The corresponding return by the index is at 15.69 percent.

While its returns look highly impressive, it is also important to pay attention to the risk profile of the fund. The foremost risk factor is its concentration in healthcare sector, though the fund mitigates some of this risk by investing in different sub-sectors. Apart from this, there is geographical risk as well since the index consists of domestic companies only and thus is particularly prone to local developments happening within the country. The fund is subjected to other risks such as market risks, security risks, etc. as well. Its leveraged position also makes it more volatile. These points need to be kept in mind while making any investment decision.

Investment Thesis

Direxion Daily Healthcare Bull 3X Shares is a leveraged fund with a bullish stance. While with its leverage, it is geared towards exploiting short-term movements, the fund has provided robust returns over a longer time period as well. Apart from providing NAV and market price growth, Direxion Daily Healthcare Bull 3X Shares has a consistent record of paying distributions as well. The fund has paid quarterly dividends consistently which is another good source of regular income for investors.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.