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The Comprehensive Guide to Pharmaceutical ETFs

PJP XPH IHE

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The pharmaceutical industry has been showing signs of recovery from one of the biggest patent cliffs in recent times. Although genericization will continue, the major patent expiries are over and done with. Focus in the pharma sector is now shifting to new products, which should start contributing significantly to results, increased pipeline visibility and appropriate utilization of cash. (Read: The Best ETFs in Market’s top sector)

Acquisitions & Divestments

Acquisitions, in-licensing activities and collaborations for the development of pipeline candidates will continue in the coming quarters. The in-licensing of promising mid-stage candidates by big pharma companies has gone up significantly – this makes sense as it helps the companies cut down on the time and cost involved in developing a product from scratch.

Therapeutic areas which could see a lot of in-licensing activity include oncology, central nervous system disorders, diabetes and immunology/inflammation. The hepatitis C virus market is also attracting a lot of attention. (Read: 3 Impressive Biotech ETFs Crushing the market)

Another trend observed in recent months is the divestment of non-core business segments so that the companies may focus on their core areas of expertise. Several companies are also entering into deals for the development of biosimilars, generic versions of biologics.

Emerging Markets

The pharma industry has also been looking towards emerging markets for growth. However, bribery and corruption related investigations into the activities of some pharma companies in China, one of the most promising emerging markets, could remain an overhang on the sector in the short term.

New Drugs to Drive Growth

The FDA approved 35 novel medicines in 2012 including promising drugs like Stivarga, Kalydeco, Xtandi and Kyprolis, which represent strong commercial potential. (Read: 2 Sector ETFs leading in Inflows)

So far in 2013, quite a few important products have gained approval including oral multiple sclerosis drug Tecfidera, type II diabetes drug Invokana, Liptruzet (cholesterol) and Fetzima (major depressive disorder). Tecfidera is off to a strong start with its launch quarter sales surpassing expectations by a wide margin.

Pharma ETFs in Focus

Highlighted below are some pharma ETFs - ETFs represent a low-cost and convenient way to get a diversified exposure to the sector.

PowerShares Dynamic Pharmaceuticals (PJP - ETF report)

PJP, launched in Jun 2005, tracks the Dynamic Pharmaceuticals Intellidex Index. The fund mainly covers health care stocks (97.09%) - the balance 2.91% consists of consumer staples stocks. The top 3 holdings are large-cap pharma company, Johnson & Johnson (5.03%), and biotech companies - Gilead Sciences, Inc. (5.08%) and Amgen (4.86%). 

The total assets of the fund as of Aug 2, 2013 were $667.7 million representing 30 holdings. The fund’s expense ratio is 0.63% while dividend yield is 1.20%. The trading volume is roughly 250,000 shares per day.

SPDR S&P Pharmaceuticals (XPH - ETF report)

XPH, launched in Jun 2006, tracks the S&P Pharmaceuticals Select Industry Index. This ETF is totally dedicated to the pharma sector with the top 3 holdings being Questcor Pharmaceuticals, Inc. (5.40%), Hospira Inc. (4.12%) and Santarus, Inc. (4.08%).

The total assets as of Aug 2, 2013 were $513.7 million representing 32 holdings. The fund’s expense ratio is 0.35% and dividend yield is 1.45%. The trading volume is roughly 23,000 shares per day.

iShares U.S. Pharmaceuticals (IHE - ETF report)

IHE, launched in May 2006, tracks the Dow Jones U.S. Select Pharmaceuticals Index. The fund mainly consists of pharma companies (99.75%). Short term securities and other/unidentified investments account for 0.19% and 0.07% of the fund, respectively.

The top 3 holdings of this fund are large-cap pharma companies - Johnson & Johnson (10.53%), Pfizer (8.73%) and Merck (7.81%). The total assets of the fund as of Aug 2, 2013 were $492.4 million representing 41 holdings.

The fund’s expense ratio is 0.46% with the dividend yield being 1.56%. The trading volume is roughly 35,000 shares per day.

Market Vectors Pharmaceutical (PPH)

PPH was launched in Dec 2011 and tracks the Market Vectors U.S. Listed Pharmaceutical 25 Index. 99.7% of the fund consists of health care stocks with the balance being represented by others. The top 3 holdings of this fund are large-cap pharma companies - Johnson & Johnson (11.09%), Pfizer (9.14%) and Novartis (7.74%).

The total assets as of Aug 2, 2013 were $239.6 million representing 26 holdings. While the expense ratio is 0.35%, dividend yield is 4.15%. The trading volume is roughly 25,000 shares per day.

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