Traders May Want to Unite Behind This Healthcare ETF

In arguably quiet fashion, the healthcare sector is racing higher. Over the 90 days ending July 7, the largest basic healthcare ETF surged 12.41%. Shares of Dow component UnitedHealth Group Inc. (UNH) were even better over that span, surging 52%.

Fortunately for aggressive traders, the health insurance giant can be livened up with the Direxion Daily UNH Bull 2X ETF (UNHU). UNHU, which attempts to deliver 200% of the daily returns of the UnitedHealth stock, debuted in March. That could prove to be a well-timed addition to Direxion’s suite of geared ETFs, because a growing number of market observers believe an earnest market rotation is afoot, and healthcare stocks are benefiting from that trend. Something else for prospective UNHU traders to consider is the strong technical state of the underlying stock.

“Technical indicators show strong buying momentum: the MACD signals a strong buy, and the ADX confirms persistent buying pressure,” according to Traders Union. “The RSI is elevated at 58.68 with a buy signal, while the Stochastic RSI at 8.69 reveals an oversold condition, creating short-term conflicting cues. Both the Commodity Channel Index (CCI) and Bull/Bear Power (BBP) reflect dominant buying, with BBP in overbought territory.”

Fundamentals Could Support UNHU, Too

As experienced investors know, the healthcare sector, particularly insurance providers, is fraught with political and regulatory risk. However, there are fundamental points of allure with UnitedHealth that could support occasional use of UNHU by risk-tolerant traders.

“In medical insurance, we believe UnitedHealth operates with cost advantages and network effects,” noted Morningstar’s Julie Utterback. “Although the firm operates a broad nationwide network, we think UnitedHealth benefits from scale advantages in specific locations, too, which is the key determinant of moats in medical insurance since local scale allows for greater negotiating leverage versus local healthcare suppliers than smaller insurers in each market.”

UnitedHealth’s pharmacy benefit manager (PBM), Optum Rx, also possesses positive moat attributes that could spark the stock and thus UNHU. In the PBM space, scale is essential, and UnitedHealth is one of a small number of players that has it. That potentially signals that Optum Rx could be an occasional propellant for the geared UNHU.

“The top three PBMs process about 80% of US pharmaceutical claims, and we think their historical cost advantages over other players led to their dominance of this market. However, they do not appear to have significant cost advantages over one another any longer,” added Utterback.

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