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This Healthcare ETF Is Ready To Rebound

May 23, 2016 8:11 am
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The VANECK VECTORS ETF TRUST GENERIC DRUGS ETF (NASDAQ: GNRX) debuted in January in what can be considered a bit of inauspicious timing for a new healthcare exchange-traded fund to come to market.

Interesting Debut Timing

Amid election year posturing, slumping biotechnology stocks and the U.S. government's efforts to crack down on inversion deals, GNRX is off nearly 7 percent since its debut. However, the ETF's slump out of the gates could be giving prescient investors a buying opportunity. Additionally, the slump experienced by generic drugs stocks is seen as overdone by some analysts.

“Interestingly, Street earnings-per-share estimates for generic-drug companies have come down, on average, about 14.6 percent, while generic-drug stocks are down, on average, about 32.1 percent for the year (the Standard & Poor’s 500 is flat), suggesting to us that the selloff may be overdone,” said Guggenheim Securities in a research note posted on Barron's. “Finally, we have estimated the amount of new launches our companies need to generate 5 percent sales growth annually, and found that these numbers are doable even when taking into account a 5 percent headwind from pricing.”

Related Link: M&A Potential With This Healthcare ETF

The Index

GNRX tracks the Indxx Global Generics & New Pharma Index. That benchmark “is intended to track the overall performance of companies that derive a significant proportion of their revenues or that have the potential to derive a significant proportion of their revenues from the generic drug industry, or that have a primary business focus on the generic drug industry,” according to VanEck.

As we noted in this space last week, “GNRX is the only ETF dedicated to generic pharmaceuticals makers. The weighted average market value of GNRX's 79 holdings is $13.9 billion, meaning the ETF is full of potential buyers and sellers assuming more industry consolidation comes to pass.”

“We expect consolidation to continue in the generic-drugs industry. Customer consolidation has been a key driver of mergers and acquisitions in the generic-drug industry. We expect this to continue, especially among small to midsize companies who need scale to improve their negotiating power with the purchasers,” according to Guggenheim.

GNRX’s Holdings

The top 10 holdings in GNRX, a group that combines for 46.3 percent of the ETF's weight include Baxalta Inc (NYSE: BXLT), Perrigo Company plc Ordinary Shares (NYSE: PRGO) and Albermale Corporation (NYSE: ALB). Nearly 57 percent of the ETF's holdings are ex-US companies, including a combined 23 percent weight to Indian and Israeli companies.

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