Pharmaceutical ETFs: A Defensive Play in 2012?

ETF Trends

There are several obstacles that are facing the health care industry this year, as well as the pharmaceutical sub-sector. For those investors that are attracted to this defensive investment, there are exchange traded funds that offer a compelling choice.

“After strength earlier in the year, pharmaceutical stocks weakened in recent weeks, with the Pharmaceuticals sub-industry essentially flat year-to-date through mid-April, versus a 9% rise in the S&P Composite 1500 Index. We believe the unfavorable comparison partly reflected investor transition from defensive sectors such as pharmaceuticals to consumer discretionary and financial sectors, and several fundamental concerns,” H. Saftlas, S&P Capital IQ Equity Analyst, wrote in a recent MarketScope article.

The ETF iShares Dow Jones US Pharmaceuticals Index Fund (IHE - News) is a pharma-focused ETF that weights heavily toward big-pharma companies. SPDR S&P Pharmaceuticals (XPH - News) focuses on smaller, generic drug companies and specialty pharmaceuticals. For investments, pharma ETFs are considered defensive since the drug industry is recession proof, as people get sick in good times as well as bad. [Utilities, Consumer and Pharma ETFs Lead 2011]

The industry is facing headwinds from patent expirations, Japanese drug price, rollbacks, European austerity measures, and unfavorable foreign exchange comparisons. From 2012-2013, investors can expect U.S. health care legislation to get in the way of industry profits.[Biotech ETFs Soar on Human Genome Bid, Gilead Drug Results]

Overall, generic drug firms are going to benefit from the patent cliff and any new health care legislation that favors inexpensive drug options. The companies with generic-rich pipelines and first-to-file generics are favorable. [Sector ETF Performance in 2011]

Tisha Guerrero contributed to this article.

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