This ETF Has A Valeant Problem

The tale of Valeant Pharmaceuticals Intl Inc VRX has gotten plenty of press in recent days. Even with Wednesday's nifty 11.9 percent surge (at this writing) on heavy volume, the drug maker's shares are still down about 18 percent over the past week and more than 23 percent over the past month.

That is good enough for bear market territory and then some.

“Valeant tumbled after Democratic lawmakers pushed for a subpoena that would force the company to disclose more information about price increases for two heart drugs,” according to Barron's.

Related Link: Valeant Gets Vote Of Confidence From BofA

As Barron's goes on to note, several hedge funds, including Bill Ackman's Pershing Square, have suffered large paper losses on the back of Valeant's decline. Other funds, including those of the exchange traded variety, have also been pinched by the pharmaceuticals maker's tumble.

A 3.4 percent weight to Valeant coupled with being a dedicated pharmaceuticals ETF in the aftermath of political posturing explain why the Market Vectors Pharmaceutical ETF PPH has struggled in recent weeks. PPH's one-month decline is just over 8 percent, or barely more than a third of Valeant's drop over the same period.

The $308.7 million PPH is home to 26 stocks, 16 of which command larger weights than Valeant. Therefore, even if the stock continues to struggle while the broader healthcare space rebounds – a big “if” at the moment to be sure, PPH should be alright.

The Canadian Element

Valeant's woes, should they persist, are more problematic for the iShares MSCI Canada Index (ETF) EWC. Valeant is a Canadian company and as such is the third-largest of the 93 stocks held be EWC. The iShares MSCI Canada ETF is the largest Canada ETF trading in New York and is the ETF with biggest Valeant weight, nearly 5.4 percent as of September 28, according to issuer data.

Being home to the largest Valeant among U.S.-listed ETFs has resulted in a one-month loss of 6.4 percent for EWC, but to be fair, the Canada ETF has been somewhat solid over the past five days, losing less than 0.75 percent.

Still, EWC is down 22 percent year-to-date. That sounds bad and it is, but most of that weakness cannot be pinned on Valeant. As home to perhaps the largest oil and gas reserves outside of the Organization of Petroleum Exporting Countries (OPEC) world, Canada and its economy are highly levered to oil prices.

That explains why the economy there is dangerously flirting with a possible recession and why, among developed market single-country ETFs, EWC is one of the most highly correlated to oil prices. The ETF allocates over 20 percent of its weight to the energy sector. Energy is EWC's second-largest sector allocation at about two and a half times the weight devoted to materials stocks.