RBS rolled out its fifth ETN this week, debuting a product that offers exposure to the world’s largest pharmaceutical firms. The new Global Big Pharma ETN (DRGS) will seek to replicate the NYSE Arca Equal Weighted Pharmaceutical Total Return Index, a benchmark that consists of equal allocations to about 16 different companies involved in various phases of development, production and marketing of pharmaceuticals.
Under The Hood
Half of the underlying portfolio consists of U.S. companies, with the other 50% of the index split between the UK (3 companies), Switzerland, Denmark, France, Israel, and Canada (one company each). The components are equal-weighted, meaning that the allocation to each is approximately equivalent upon rebalancing. Equal-weighted indexes have become increasingly popular as the underlying for exchange-traded products, as many investors have embraced this methodology as an alternative to the potentially inefficient–but still dominant–market capitalization weighting. Because equal weighting breaks the link between index weight and stock price, it avoids the tendency to overweight overvalued stocks that can plague market cap-weighted products [see also Alternative Weighting Strategies & ETFs: Is Market Cap Weighting Flawed?].
Pharma ETFs In Focus
Prior to the launch of DRGS, there were four pharmaceutical ETFs that had aggregate assets of more than $1 billion: the Pharmaceutical HOLDRS (PPH), iShares Dow Jones U.S. Pharmaceuticals Index Fund (IHE), SPDR S&P Pharmaceuticals ETF (XPH), and PowerShares Dynamic Pharmaceuticals Portfolio (PJP). Each of those funds consists entirely of U.S.-listed pharma stocks, meaning that international firms such as GlaxoSmithKline plc, AstraSZeneca PLC, and Teva Pharmaceuticals are excluded. DRGS maintains a global portfolio that includes pharma giants from companies outside the U.S., making it the only global pharmaceutical ETP available to U.S. investors. “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 [see also The Pharma Four: Similar ETFs, Different Returns].
None of the aforementioned pharma ETPs are ETNs; PPH is a HOLDR that is scheduled to be converted to a Van Eck ETF later this year, while IHE, XPH, and PJP are all ETFs. XPH is linked to a modified equal-weighted index that utilizes a similar methodology to the benchmark underlying DRGS. That ETF, however, maintains a considerably deeper portfolio of about 30 U.S. stocks.
Pharma ETPs have become popular as a source of attractive distribution yields in recent years; according to RBS, the index underlying DRGS has offered a dividend yield greater than the S&P 500 for the last six years.
DRGS is the fifth ETN from RBS, and the first not linked to the Trendpilot methodology that has become popular among investors looking to combine trend following strategies with the exchange-traded structure. The other products in the RBS lineup oscillate exposure between select asset classes and cash depending on pricing relative to moving averages. Those ETNs include exposure to large caps, mid caps, oil futures, and gold [see TBAR's Hidden Value].
DRGS will charge a management fee of 0.60%, within the range of expenses for existing pharmaceutical ETPs.
Disclosure: Photo courtesy of David Richfield. No positions at time of writing.