2023-07-11 12:11:15 ET
Summary
- IXVTR has been one of the best-performing healthcare indices. Investments in a 3x leveraged ETF benchmarking IXVTR can thus provide attractive returns.
- CURE has been one of those rare 3x leveraged ETFs that generated consistent returns not only during short runs, but over a much longer time horizon, too.
- CURE’s major investments have delivered positive price growth over the past 12 years of its existence. Its 3x investments too delivered 29 percent returns.
- Investments in derivatives and short-term volatility makes CURE a high-risk fund. Moreover, CURE generates a negligible yield of around 1.5 percent.
- Despite CURE generating a strong growth over the long run, beta slippage will always remain a major concern. The fund is highly volatile over the short term.
~ by Snehasish Chaudhuri, MBA (Finance)
Direxion Daily Healthcare Bull 3X Shares ( CURE ) is a triple-leveraged bull ETF and provides 300 percent risk and volatility vis-a-vis its underlying index. The fund is targeted at tactical investors looking to benefit from short-term price growth in the healthcare sector. CURE uses derivatives and debt instruments in order to deliver three times the daily performance of that benchmark index. Being a leveraged fund, it is best positioned to exploit short-term movements. At the same time, the fund provided robust returns over a longer time period. CURE is also consistent in its payouts. As the healthcare sector has started recovering and posting positive returns, there is a possibility of CURE providing similar strong returns in the coming years, too.
I Previously considered CURE to Be a Risky But Equally Lucrative 3X Leveraged Fund
CURE's performance Is benchmarked against the performance of the Health Care Select Sector Index TR (IXVTR). The only difference is CURE moves 3x upwards or downwards on a daily basis as compared to IXVTR. During my last coverage more than a year back, I found Direxion Daily Healthcare Bull 3X Shares to be a risky investment, due to this very 3x leverage. In addition, CURE also generated negligible dividend yield and had a high expense ratio in excess of 1 percent. At the same time, this fund was quite lucrative, too. Overall, an investor could invest a smaller amount of money, for the exposure earned by the ETF, while not needing to manage a portfolio of individual stocks. CURE was also one of those rare 3x ETFs that generated returns not only during short runs, but over a much longer time horizon, too.
CURE Exploits Short-term Price Movements And Provides Returns Over Long-Term
Almost two years ago Direxion Daily Healthcare Bull 3X Shares witnessed some signs of a depression, which made it attractive. Constituents were mostly mid-to-large cap healthcare stocks with diverse business profiles. In October 2021, I reported that the fund delivered remarkable growth over the past one year. "CURE provided a whopping 91.84 percent growth on its NAV while its underlying index grew 27.92 percent growth during the same time. For a 3-year time frame, the fund delivered annualized growth of 32.65 percent. The fund largely benefited from positive movements in the healthcare sector". In the last 10 years, barring only 2016 and 2022 - which were extremely poor years for the healthcare industry - CURE generated strong enough returns.
CURE Invests 3x in Derivatives of Stocks from Diversified Healthcare Segments
Direxion Daily Healthcare Bull 3X Shares had more than 70 percent of its exposure in derivatives from five segments - biotechnology, life sciences' tools & services, pharmaceutical, managed healthcare, and healthcare equipment. Most prominent exposures remained in large-cap pharmaceutical giants like Johnson & Johnson ( JNJ ), Bristol-Myers Squibb Company ( BMY ), and so on; and in managed healthcare firms like Centene Corporation ( CNC ), HCA Healthcare, Inc. ( HCA ), etc. Almost 34 percent of CURE's exposure was in the 12 big healthcare stocks.
Direxion Daily Healthcare Bull 3X Shares also had exposures in a huge number of stocks from the biotechnology and life science segments. Healthcare equipment firms such as Intuitive Surgical, Inc. ( ISRG ) were also an integral part of CURE's portfolio. This segment is one exception that has successfully delivered positive returns during the covid-19 pandemic as well as the later period involving Russia's invasion.
CURE Had a Poor 2023, but its Long-Term Performance Has Been Impressive
CURE's investments in pharmaceutical and managed healthcare stocks determined the trend of its entire portfolio. These stocks performed poorly during 2023, as the case has been with the overall healthcare sector. However, over the past five years, barring PFE and BMY, all other stocks registered a CAGR price growth in excess of 5.15 percent, and over the past 12 years of CURE's existence, this price CAGR was in excess of 7.65 percent. Direxion Daily Healthcare Bull 3X Shares replicated the same trend. While, during 2023, its price fell by almost 12 percent, CURE registered an annualized price growth of almost 18 and 29 percent over the past 5 years and 12 years, respectively.
CURE's exposures in biotechnology and life Sciences' tools & Services sectors followed a similar trend. The fund had major exposure on 21 stocks from these two sectors and all of them registered price CAGR in excess of 7.65 percent over the past 12 years of CURE's existence. Performance of healthcare equipment stocks had been much more impressive. During 2023, almost all stocks generated positive price growth, and over the past 12 years of CURE's existence, this price growth has been enormous. As Direxion Daily Healthcare Bull 3X Shares have a 3X exposure on all these stocks, it was able to generate huge price growth from exposure in this segment.
Risks: Investors Should be Aware of Beta Slippage While Investing Over Long-Term
Despite Direxion Daily Healthcare Bull 3X ETF having generated strong growth over the past decade, beta slippage will always remain a major concern. CURE is a 3X leverage fund, which is benchmarked on IXVTR. For obvious reasons, the percentage change in the value of this leveraged ETF will be much higher than the percentage change in IXVTR or any unleveraged fund with a similar kind of portfolio composition.
In a scenario where IXVTR rises by 25 percent and then falls by down 20 percent, the index will return to its starting point. But, a 3x leveraged ETF following this index would rise by 75 percent the first day and fall by 60 percent the next day, resulting in a 30% loss of value. This phenomenon named beta-slippage will bring down the value of 3x leveraged funds drastically. FHLC with an almost similar portfolio composition generated a negative price return of 1.13 percent during the past one year. During the same period, CURE's return was negative 15.59 percent, thus having a drift of negative 3.6 percent. This drift is something investors should be aware of while investing in Direxion Daily Healthcare Bull 3X Shares over the long term.
Such a high level of short-term volatility makes the return of Direxion Daily Healthcare Bull 3X Shares extremely speculative. In a bearish market condition, the chances of a 3x leveraged fund delivering negative returns are exceptionally high. Even under a bullish market scenario, this fund can't be treated as a safe investment option. All bull runs have a tendency of being disrupted by some smaller periods of downward price movements. Moreover, the market has a tendency to react to negative news and events much more severely than on positive announcements. This again makes CURE very risky.
Investment Thesis
As Direxion Daily Healthcare Bull 3X Shares invests in derivative products, investors will always be at significantly higher risk. However, this fund takes three times the exposure in a particular stock, in which its benchmark index invests only 1x times. As a result of this, a 3x ETF can provide attractive returns provided that its benchmark generates some positive growth. Despite going through an uncertain economic scenario during the past three years, the benchmark index, IXVTR, has been one of the best-performing indices, and relatively better than that of the S&P 500. IXVTR generated an annual average price growth of 15.4 percent , while S&P had a price increase of 12.4 percent .
Direxion Daily Healthcare Bull 3X Shares had exposures primarily in five healthcare segments. Major stocks in all these five segments delivered positive price growth over the long run. Understandably, CURE's 3x exposure to those stocks generated enormous growth over the long run. That's why I don't find any reason to liquidate one's stake in this fund, more so because it is not trading at a premium. However, at the same time, its high risk, and short-term volatility don't make sense to accumulate more units of this fund. Beta slippage will always remain a major concern and negatively impact long-term investors. Moreover, CURE generates only a small yield of around 1.5 percent. I'll thus continue to assign a Hold rating to this 3X leveraged diversified healthcare ETF.
For further details see:
CURE: One Of Those Rare 3x Leveraged ETFs That Has Delivered Long-Term Returns