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After the incredible surge in 2013, the healthcare sector is no doubt crushing the overall market this year too. This is largely thanks to the bullish trend in both the pharma and biotech segments and robust performances by major drug companies (read: 3 Top Ranked Healthcare ETFs in Focus).
Total fourth quarter earnings for the medical sector reported so far are up 1% with a beat ratio of 74.5% while revenues are up 6% with a beat ratio of 72.3%. Though biotech stocks continued their strong performances, pharma stocks have shown a strong turnaround from the recent patent cliffs and became the darlings of the financial market of late.
Encouraging Trends
Increasing merger and acquisition activities, promising new drugs and their approval, restructuring, increased pipeline visibility, aging population and expansion into emerging markets are boosting confidence in the pharma sector.  
In addition, the Affordable Care Act (often known as Obamacare) – which ensures a larger base of insured persons across the U.S. – is fueling growth. With expanded healthcare coverage, this corner of the healthcare space will likely be a huge beneficiary, boosting sales for many drug companies, as drugs would be accessible to a large number of Americans (read: Obamacare Will Be Amazing for These Stocks and ETFs).
Further, the bullish trend for the sector is confirmed by the Zacks Industry Rank, as pharma has one of the best ranks for any industry at the time of writing. Three out of four Zacks industries that are classified under pharma have Zacks Ranks in the top 37%, suggesting solid trading for this segment in the coming months.
Moreover, the sector might be a good defensive play in order to withstand the current volatility in the market arising from the Fed’s unwinding monetary stimulus and the recent sluggish U.S. economic data.
Top Pharma ETFs to Consider
Given this favorable position of the pharma industry, investors may want to consider some of the ETFs tracking this space for exposure. While there a number of quality choices in the space, we have highlighted some of our favorite top performing pharma ETFs below, any of which could make for excellent investments in today’s growth-focused market (see: all the Healthcare ETFs here):
SPDR S&P Pharmaceuticals ETF (XPH - ETF report)
The fund tracks the S&P Pharmaceuticals Select Industry Index, holding 33 securities in its basket. The product has $913.3 million in AUM and trades more than 110,000 shares in volume a day, while its cost is just 35 basis points a year.
The product is pretty well spread across each security as the top 10 holdings account for nearly 43% of the total assets. Forest Laboratories (FRX), Jazz Pharmaceuticals (JAZZ) and Questcor Pharmaceuticals (QCOR) occupy the top three positions in the basket with a combined 14.58% share. While large caps account for 44% of total assets, small and mid caps take the remainder.
The product gained about 13% so far in the year and has a Zacks ETF Rank of 2 or ‘Buy’ rating with ‘Low’ risk outlook.
iShares U.S. Pharmaceuticals ETF (IHE - ETF report))
This ETF tracks the Dow Jones U.S. Select Pharmaceuticals Index and holds 36 securities in its basket. The product has amassed $659 million in its asset base while volume is relatively light at less than 24,000 shares a day on average. The fund charges 45 bps in fees per year from its investors (read: A Comprehensive Guide to Pharma ETFs). 
In terms of individual holdings, the top three holdings – Johnson & Johnson (JNJ), Pfizer (PFE) and Merck (MRK) – together make up for 29.64% 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 93% share, biotech receives a minor allocation.
The ETF gained nearly 11.30% year-to-date and has a decent Zacks ETF Rank of 3 or ‘Hold’ rating with ‘Low’ risk outlook.
PowerShares Dynamic Pharmaceuticals Fund (PJP - ETF report)
This is by far the most popular choice in the pharma corner of the healthcare segment that follows the Dynamic Pharmaceuticals Intellidex Index. The product has a good level of AUM of about $1.2 billion and sees solid volume of roughly 216,000 shares a day. The fund charges 63 bps in fees and expenses from investors.
With holdings of 29 stocks, the fund is moderately concentrated in the top 10 holdings and focuses more on large caps with 62% of total assets. Biogen (BIIB), Merck and Gilead Sciences (GILD) are the top three components in the basket, accounting for nearly 5% share each. In terms of industrial exposure, 68% of assets are allocated to pharmaceuticals while 27% and 5% are allotted to biotechnology and medical equipment, respectively.
The product added nearly 11% so far this year. PJP has a Zacks ETF Rank of 3 or ‘Hold’ rating with ‘Low’ risk outlook.
Bottom Line
These products are clearly outpacing the broad market fund (SPY) and the broad sector fund (XLV) by wide margins (read: 3 Sector ETFs Surging to Start 2014). This trend is likely to continue in the coming months given the recent market volatility and the promises made by Obamacare, solid industry rank, and M&A opportunities in this corner of the investing world.
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