XPH SPDR S&P Pharmaceuticals

The pharmaceutical industry has been performing remarkably well this year afteremerging relatively unscathed from one of the biggest patent cliffs in recent times. Thanks goes largely to robust earnings growth, new drug approvals and increasing merger & acquisition activities. While the industry is not completely free from genericization, major patent expiries are over and done with.
 
In fact, pharma has been leading the healthcare world over the past one month. This corner of the healthcare space has posted solid earnings, resulting in soaring stock prices (read: Time for Pharmaceutical ETFs?).
 
Total earnings for the medical sector that have reported third quarter results so far are up 0.2% with a beat ratio of 74.5%, while revenues are up 5.8% with a beat ratio of 51%. The numbers look impressive when compared to the second quarter earnings decline of 1.6% with a beat ratio of 71.4% and revenue growth of 2.4% with a beat ratio of 51%.
 
Robust performance from some of the companies in the sector from large-to-small caps, such as, Pfizer (PFE), Bristol-Myers Squibb (BMY), Merck & Co. (MRK), Johnson & Johnson (JNJ), Amgen (AMGN), Santarus (SNTS) and Endo Health Solutions (ENDP) has spread an air of optimism.
 
f Favorable earnings results have duly been reflected in the Street’s response, with a number of analysts raising their estimates on the companies in the sector (read: 4 Ways to Play the Bullish Trend in Healthcare with ETFs).
 
Aat the time of writing. All the four Zacks industries that are classified under pharma have Zacks Ranks in the top 30%, suggesting good trading for this segment in the coming months.
 
Other encouraging trends that drive this sector include an ageing population, people surviving longer with chronic diseases and technology revolutions.
 
How to Play?
 
Investors looking to gain exposure to this trend may want to take a look at the following ETFs, as these offer concentrated exposure to pharmaceutical firms. These products are not only likely winners post Q3, but for months to come as well (see: all the Healthcare ETFs here).
 
SPDR S&P Pharmaceuticals ETF (XPH)
 
The fund tracks the S&P Pharmaceuticals Select Industry Index, holding 32 securities in its basket. The product has $659.6 million in AUM and trades more than 90,000 shares in volume a day, while its cost is just 35 basis points a year.
 
The product is well spread across each security as the top 10 holdings account for less than 42% of the total assets. ENDP, SNTS and Salix Pharmaceuticals (SLXP) occupy the top three positions in the basket with a combined 13.93% share. While large caps account for 43% of total assets, small and mid caps take the remainder.
 
The product generated returns of nearly 9% in the trailing one-month period and 55% in the year-to-date timeframe. The fund has a Zacks ETF Rank of 2 or ‘Buy’ rating with ‘Low’ risk outlook.
 
PowerShares Dynamic Pharmaceuticals Fund (PJP)
 
This is by far the most popular choice in the pharma corner of the healthcare segment. This ETF follows the Dynamic Pharmaceuticals Intellidex Index. The product has a good level of assets under management of about $813.6 million and sees solid volume of roughly 160,000 shares a day. The fund charges 63 bps in fees and expenses from investors.
 
With holdings of 28 stocks, the fund is moderately concentrated in the top 10 holdings and focuses more on large caps with 64% of total assets. Small caps account for 24% while the rest goes towards mid caps. BMY, Gilead Sciences (GILD) and PFE are the top three components in the basket, accounting for 5% share each.
 
In terms of industrial exposure, 71% of assets are allocated to pharmaceuticals while 21% are allotted to biotechnology (read: The Comprehensive Guide to Pharmaceutical ETFs). The product added nearly 7% over the past month and is up over 49% so far this year. PJP has a Zacks ETF Rank of 3 or ‘Hold’ rating with ‘Low’ risk outlook.
 
iShares U.S. Pharmaceuticals ETF (IHE)
 
This ETF tracks the Dow Jones U.S. Select Pharmaceuticals Index and holds 39 securities in its basket. The product has amassed $536.4 million in its asset base while volume is relatively light at less than 24,000 shares a day on an average. The fund charges 46 bps in fees per year from its investors. 
 
In terms of individual holdings, the top three holdings – JNJ, PFE and MRK – together make up for 28% share in the basket, suggesting heavy concentration. IHE is a large cap-centric fund accounting for 68% of the assets. Though pharmaceuticals make up for a substantial 85% share, biotech, medical equipment and personal care receive minor allocations.
 
The ETF gained nearly 7% over the past one month while it is up about 37% year to date. This fund also has a decent Zacks ETF Rank of 3 or ‘Hold’ rating with ‘Low’ risk outlook.

 

Bottom Line
 
These pharma products have clearly outpaced the broad market fund (SPY) and the broad sector fund (XLV) by wide margins. This outperformance and a promising trend going forward are expected to continue given the demographic shift in the U.S. as well as the insatiable demand for new treatments and drugs for myriad illnesses.
 
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ISHARS-US PHARM (IHE): ETF Research Reports
 
PWRSH-DYN PHARM (PJP): ETF Research Reports
 
SPDR-SP PHARMA (XPH): ETF Research Reports
 
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