Are Healthcare ETFs Facing an Upcycle?

Are Healthcare ETFs Facing an Upcycle?

Funds like Direxion’s CURE could grab investors’ attention away from the AI craze.

Sean-Daly310x310
|
Reviewed by: Lisa Barr
,
Edited by: Daria Solovieva

Technology’s relentless momentum has taken a lot of oxygen out of the room this spring, but astute investors might want to look to healthcare as the next economic sector that could take up the baton.  

Just as Nvidia’s artificial intelligence forecast tantalized investors in May, Eli Lilly’s Mounjaro or Madrigal’s first NASH treatment Resmetirom are true wonder drugs that will surely fire up traders later this fall as FDA approvals arrive.  

And the Health Care Select Sector SPDR Fund (XLV) is dry kindling—though it represents nearly 20% of the U.S. economy, it has been dormant, down 2.33% for this year despite being down a full 20% in 2022. Prudent profit taking in tech and hedging for a shallow recession in 2024 could easily lead the sector to outperformance for the rest of the year.  

One high-octane way to trade such a transition would be through the Direxion Daily Healthcare Bull 3x Shares (CURE), a leveraged fund that offers three times the performance of its benchmark index, the Health Care Select Sector Index, providing a magnified return on a single-day basis via derivatives and debt instruments.  

CURE is a passive ETF, with a high expense ratio of .99 and yield of .90%. What makes this fund distinct is that it is a 3x leveraged passive fund: This octane can be seen in the ETF's high five-year beta of 2.22 and its alpha of 2.16.  

Due to their multiday tracking inefficiency, or “beta slippage,” leveraged ETFs like CURE are not for the faint of heart and are best deployed only by experienced swing traders.  

But the fund was launched by Direxion Investments exactly 12 years ago this month, so it has an amazingly long and impressive track record for a leveraged ETF. 

Long-Term Outperformance 

SPY has certainly trumped CURE year to –date, but pulling out to a three-year time frame, you see CURE has outperformed, up 88.46% versus SPY’s 49.10%: 

 

CURE 3-year chart

 

In fact, over its 12-year history, from June 2011 to June 16, 2023, CURE is up 1,917% versus the S&P 500’s 248%. According to this Schwab graph, a $10,000 investment in CURE exactly 10 years ago would be worth $81,595 compared to $31,034 for the S&P 500. 

 

Investment Growth

 

There are two possible reasons for this: Statistically, healthcare has more “up days” than other, more cyclically prone market segments, and investors often transition to it after a momentum-driven rally or when they feel the chill of a bear market.  

CURE itself didn’t top out until early April 2022, five months after the Nasdaq did in November 2021. Also, more fundamentally, it is in these long durations that you see Benjamin Graham’s famous “stock market as a weighing machine” analogy play out, as healthcare grows with the needs of an aging world population.  

The Divergence  

Since the start of 2023, however, we have seen an inverse relationship of CURE with the S&P 500 index as it got pulled with the Technology Select Sector SPDR Fund (XLK)

 

CURE YTD

 

CURE is down -17.29% compared to an S&P 500 that is up 14.76%, juiced by the tech sector that is presently up 38.85%.  

The abrupt shift from defensive to risk-on sectors is the best explanation for this extreme disconnect between CURE and the S&P 500. Yes, a jump in elective surgeries pushed off by COVID—knee and hip replacements, etc.—is hurting providers like UnitedHealth and Humana at present, but only the astounding surge in mega tech could conceal a drop of the big pharma and healthcare titans.  

The New Upcycle 

Technical indicators are most insightful when they clarify inflections in the price action and changes in momentum. In this regard, a three-year, weekly chart makes a strong argument that CURE’s relative strength index topped out in August 2021 and reached its last low in March 2023. 

Likewise, CURE's MACD indicator peaks on Aug. 29, 2021, with the two later price highs of Dec. 27, 2021 and April 4, 2022 not being confirmed by the indicator—and finally troughs on Oct. 2, 2022. 

 

CURE_MACD triple bottom

 

After this top-to-bottom MACD swing over a 54-week period, we then saw a price spike to $125 by Dec. 12, 2022, followed by a drop to $85 that essentially retested the June and October 2022 lows in a “triple bottom.” 

Since then, there was a higher low on May 31 confirmed by both the MACD and the RSI—a very good signal that CURE is now in an upcycle. 

Remember CURE was down 20.50% in 2022, an atypical year for a momentum vehicle that leverages the healthcare sector, which now makes up 20% of the U.S. economy and rising. Back in 2016, when it dropped 17%, it returned 69% the following year. Back-to-back drops are unlikely.  

 

CURE annualized returns 2012 to present

 

To return to Graham’s metaphor: Today’s market is a voting machine, and AI is clearly on the ballot. But once traders start to register that large language models and machine learning have been around for a while, and that there is a lot of “AI washing” going on, sophisticated investors might start trimming.  

XLK is already up 40% year to date and if the so-called AI spend starts to gut traditional software outlays, then the summer will be spent looking for those tech companies—like Chegg—that might be the casualties of all this Schumpeterian creative destruction.    

The “slain seven” will replace the “magnificent seven” as a topic of CNBC discussion. Healthcare will be waiting in the wings.  

Sean Daly writes on ETFs, biotech and wealth management. He was educated at Columbia University and has taught international finance, computing and financial risk management at Pace, Tulane and Princeton. Follow him on Twitter (X) via @Sean_Daly_.