Despite major obstacles, the healthcare sector has been posting positive revenue growth for quite some time. However, profitability has been under pressure and Earnings per share (EPS) growth has not been up to expectations.
The sector has been heavily impacted by the lack of new products coupled with exhausting product pipelines. These continue to malign the outlook for many firms from the healthcare sector.
Of course, the biotechnology industry has gone a long way in adding to the product pipelines which was primarily the reason for positive revenue growth for the industry as a whole. Furthermore, the industry has been facing serious headwinds in the recent past in the form of a huge patent cliff as many of the billion dollar drugs are fast approaching the end of their protection periods (see more in the Zacks ETF Center).
Also, the pharmaceutical industry faces stiff competition from the generic counterparts and is aware of the support of the Obama administration for generics which seeks to implement a proposal to reduce entry barriers for these products. This will certainly make the industry more competitive and not help the cause of many firms hanging on to their limited amount of on-patent drugs (read Uncertain about the Economy? Try Market Neutral ETFs)
While the sector has been facing headwinds on the revenue front, in terms of stock market performance the sector clearly has been a winner so far this year. Of all the ten S&P 500 sector based ETFs from State Street Global Advisors (SSGA), the Healthcare Select Sector SPDR (XLV) has added an impressive 17.50% on a year to date basis, behind only Technology (XLK), Financials (XLF) and Consumer Discretionary ETFs (XLY).
This has largely been possible due to the defensive nature of the sector that has allowed a few firms to hold steady in these turbulent times. Given this, a look at some of the top ranked ETFs in the space could be great picks for investors seeking exposure in this slice of the market (see Target Allocation ETF Investing 101).
About the Zacks ETF Rank
A look at top ranked Pharmaceutical ETFs can be done by using the Zacks ETF Rank. This technique provides a recommendation for the ETF in the context of our outlook of the underlying industry, sector, style box, or asset class. Our proprietary methodology also takes into account the risk preferences of investors as well.
The aim of our models is to select the best ETFs within each risk category. We assign each ETF one of five ranks within each risk bucket. Thus, a Zacks Rank reflects the expected return of an ETF relative to other ETFs with similar level of risk.
Using this strategy, we have found an ETF which is Ranked 1 or ‘Strong Buy’ in the pharmaceutical industry which we have highlighted in greater detail below:
Guggenheim S&P 500 Equal Weight Healthcare ETF (RYH)
Launched in May of 2006, iShares Dow Jones US Pharmaceuticals Fund (RYH - ETF report) is an exchange traded fund (ETF) designed to provide a broad exposure to the U.S. equity market with a focus on the Healthcare sector.
RYH tracks the S&P Equal Weight Health Care Index before fees and expenses. The index includes stocks of those companies which comprise the Healthcare sector of the S&P 500 Index. However, as opposed to their market capitalization weighing methodology in the S&P 500 index, the components are weighed equally in the S&P Equal Weight Healthcare Index (read Health Care ETFs in Focus on Obamacare Supreme Court Decision).
RYH provides a targeted bet on one of the most defensive sectors in the U.S. market which has attracted investors’ attention and confidence amidst current global economic uncertainties.
Also the equal weighing methodology goes a long way in eliminating company/event specific risk for the product, as bigger companies with higher market capitalization (implying more weighting) could distort the overall returns of RYH (see Is It Time For an Equal Weight ETF?). Both of these factors have contributed in making the product a low risk one.
Over the past three years the ETF has had low historic volatility as measured by its annualized standard deviation of just 17.50% (as of 30th September 2012). This is also reflected in our outlook for the product as we maintain a ‘Low’ risk outlook along with a Zacks ETF Rank of 1 or ‘Strong Buy.’ It charges an expense ratio of 50 basis points.
RYH has a basket of 52 stocks with allocations in individual components ranging from 2.10% to 1.55%.
RYH has returned an impressive 18.60% YTD (as of 30th September 2012), slightly outperforming the broad markets over the time frame. Still, on a one year look, the fund is holding up even better with a gain of over 26% in the trailing 52 weeks as of the 30th of September.
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