Avoiding Pharmaceuticals Fallout, Sort Of With ETFs

Investors that closely follow the health care sector are most likely at least somewhat familiar with the carnage at Valeant Pharmaceuticals International Inc. VRX. Shares of the controversial pharmaceuticals maker have lost nearly two-thirds of their value over the past 90 days, plaguing some hedge funds and exchange traded funds along the way.

On Monday, shares of Mallinckrodt PLC MNK slid more than 17.4, a decline, which as Benzinga reported, appears to have “been triggered by a tweet from Citron Research ‏(@CitronResearch), which read, “At these prices $MNK has signif more downside than $VRX-- far worse offender of the reimb sys - more to follow. VRX can't live in a vacuum.” 

Clearly, Citron expects more downside for Mallinckrodt, another pharmaceuticals favorite among the hedge fund crowd, so that leaves ETF investors looking for pharmaceuticals exposure with a simple: Do some homework and study healthcare ETFs' holdings. Or just skip to the $1.6 billion PowerShares Dynamic Pharmaceuticals Portfolio PJP.

PJP, which is a strategic beta ETF that evaluates its 23 holdings based on price momentum, earnings momentum, quality, management action, and value, currently does not feature Mallinckrodt or Valeant on its roster. However, that does not mean Valeant's woes have not permeated PJP. The ETF has tumbled nearly 11 percent since Valeant's slide began.

Still, PJP deserves some credit as it has popped 3.3 percent over the past month, a period in which Valeant has lost more than half its value. For the bold trader, the Direxion Daily Pharmaceutical & Medical Bull 2X Shares PILL is also worth a look.

PILL, which attempts to deliver double the daily performance of PJP's underlying index, debuted less than two months ago, but has managed to climbed nearly 7.7 percent over the past month. Lack of Mallinckrodt and Valeant exposure is not the only reason to mull PJP and PILL.

PJP allocates a combined 10.7 percent of its weight to Dow component Pfizer Inc. PFE and Allergan Plc AGN, two companies that could announce one of the biggest health care marriages in recent memory by Thanksgiving. PILL would also be clearly levered to that a positive outcome for that deal.

And if deterioration in shares of Malinckrodt and Valeant proves too much for the broader pharmaceuticals space to handle, the Direxion Daily Pharmaceutical & Medical Bear 2X Shares PILS will get its turn in the limelight. PILS, which debuted on the same days as PILL, seeks to deliver twice the daily inverse returns of PJP's index.