Market Overview

A Look at The New DRGS ETN


Last week, RBS Securities added the fifth exchange traded note (ETN) to its growing lineup with the introduction of the RBS Global Big Pharma ETN (NYSE: DRGS). At its core, the new fund is essentially the ETN equivalent of popular pharma ETFs such as the SPDR S&P Pharmaceuticals ETF (NYSE: XPH), the Pharmaceutical HOLDRs (AMEX: PPH) and the iShares Dow Jones US Pharmaceuticals Index Fund (NYSE: IHE).

Equity-based ETNs usually have smaller lineups than their ETF equivalents and DRGS is no different as the new fund is home to just 16 stocks. By comparison, XPH is home to 28 stocks and IHE holds 40 stocks.

DRGS is bit more global in its approach as eight of the ETN's stocks are U.S.-based while the other half are based outside the U.S. In addition, the new ETN offers an equial-weight approach as holdings range in weight from 5.65% to 6.58%. Comparable pharma ETNs do not take that approach.

“The RBS Global Big Pharma ETNs are designed for investors who seek an equally weighted pure play on the global pharmaceutical industry,” said Michael Nelskyla, Head of Structured Retail Distribution, Americas, in a statement.

In terms of its lineup, DRGS isn't much different than the more established ETF with which its going to compete. Its holdings read like a usual suspects list of pharma exchange-traded products. Bristol-Myers Squibb (NYSE: BMY), Merck (NYSE: MRK), Allergan (NYSE: AGN), Johnson & Johnson (NYSE: JNJ) and Abbott Labs (NYSE: ABT) can all be found in DRGS' top-10 holdings and the ETN also features exposure to Pfizer (NYSE: PFE) and Teva (Nasdaq: TEVA).

With an expense ratio of 0.6%, DRGS is pricier than XPH (0.35%) and IHE (0.48%), but the ETN's dividend yield of 3.3% is vastly superior to the yields on XPH and IHE. However, PPH offers a yield that is about 1% higher than DRGS.

In the essence of fairness, it's too early to pass judgment on DRGS, but it's clear the ETN faces intense competition in the form of more well-established ETFs.

Bull case: The hunt for yield and defensive exchange-traded products could be a boon for DRGS.

Bear case: The market tumbles mightily again and elevated correlations prove that even pharma is no place to hideout.

Posted-In: Long Ideas News Sector ETFs Short Ideas Specialty ETFs New ETFs Intraday Update Markets


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