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ETF News And Commentary

The pharma corner of the broader healthcare space is one of the most happening sectors this year given the rising wave of merger and acquisition (M&A) activities, which lifted many drug stocks higher (read: Pharma M&A Frenzy Pushing These ETFs Higher).

The industry, which was struggling with genericization over the past few years, is now on the verge of recovery and showing substantial improvement. This is because an aging population, higher rates of chronic diseases, promising new drugs, cost-cutting efforts, increased pipeline visibility, growing demand in emerging markets and the Affordable Care Act (often known as Obamacare) are propelling growth in the sector.

This trend is likely to continue in the coming months as pharma has one of the best ranks for any industry as per the Zacks Industry Rank at the time of writing. Three of the four Zacks industries that are classified under pharma have a Zacks Rank in the top 37%. Further, impending M&A activities would continue to boost this corner of the investing world.

Moreover, the sector might be a good defensive play to withstand the current market turmoil arising from uneven U.S. economic growth, slowdown in Chinese economy, rising tension in Ukraine and instability in Iraq (read: A Comprehensive Guide to Pharma ETFs).

Given these positive trends, a good way to seek entry into the pharma world is by tilting toward companies in this segment. While there are a number of ways to invest in this surging corner of the market, SPDR S&P Pharmaceuticals ETF (XPH - ETF report) could be an excellent play.

XPH in Focus

The fund tracks the S&P Pharmaceuticals Select Industry Index, holding 34 securities in its basket. It is well spread across each security as each holds less than 4.7% of the total assets. Questcor Pharmaceuticals, Allergan and Hospira take the top three positions in the basket with a combined 12.8% share. This suggests a low concentration risk of 8.37% as per fidelity.com.

Though the product has a slight tilt toward large caps at 43%, it provides a nice mix of mid and small cap securities as well. Additionally, growth stocks dominate the fund’s return at 64%, which makes it a great strategy in a trending market (i.e. a market characterized by a prolonged up or downtrend). This is because stocks in the growth ETF portfolio harness their earnings momentum to create a positive bias in the market, resulting in rocketing share prices (read: 2 Top Ranked Large Cap Growth ETFs in Focus).

However, growth stocks tend to be more volatile compared to value counterparts, suggesting some degree of risk as indicated by its annualized standard deviation of 16.12%. XPH is often considered a high momentum (the change in the fund’s price over the past three months) ETF with value closer to 103, suggesting that it will continue to move higher relative to its counterparts.

The fund has amassed $920.2 million in its asset base while trades in average daily volume of 113,000 shares per day. This suggests some additional cost for this product in the form of relatively tight bid/ask spread beyond the expense ratio of 0.35%.

Moreover, the performance of the fund has been quite impressive, delivering a robust return of more than 118% over the trailing three-year period, 44.6% over the one-year and 15.9% year-to-date. In fact, XPH is beating the broad sector fund – Health Care Select Sector SPDR (XLV - ETF report) – by a wide margin this year and this trend is likely to continue given that the fund has a Zacks ETF Rank of 1 or ‘Strong Buy’ rating with a ‘Medium’ risk outlook (see: all the healthcare ETFs).

Bottom Line
 
This ETF is considered a solid pick relative to other options in the space given its strong fundamentals and the growing pharma space. Pharma will continue to grow no matter what happens, especially given the demographic shift in the U.S. and the insatiable demand for new treatments and drugs for many illnesses.

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