Like other healthcare exchange traded funds (ETFs), dedicated pharmaceuticals ETFs are struggling this year. While prescription drug sales jumped last year and are expected to continue doing so over the next several years, rising prices for some big-name drugs have drawn the ire of politicians, leading to election year pressure on pharmaceuticals stocks and ETFs.
The PowerShares Dynamic Pharmaceuticals Portfolio (PJP) could be a leader should pharmaceuticals ETFs regain their momentum.
PJP is a departure from the traditional market capitalization-weighted health care ETF in that its underlying index evaluates companies for inclusion based on “price momentum, earnings momentum, quality, management action, and value,” according to PowerShares.
However, if there is one thing PJP has recently become known for, aside from its stellar returns, it is being front-and-center in the pharmaceuticals industry consolidation.
Home to Perrigo (PRGO) and Mylan (MYL), among others, PJP is awash in specialty pharmaceuticals buyers and sellers. For the moment, PJP’s lineup is probably littered more with buyers than sellers, the result of the ETF’s weights to the largest biotech stocks and the aforementioned blue-chip pharma names. However, several of PJP’s other holdings have been bandied about as potential targets.
PJP is “still well within the bounds of the non-cyclical Health Care sector but puts into play a risk reward dynamic in favor of the ‘cautiously aggressive’ investor. In fact, the fund has done exceptionally well, increasing over fivefold since its June 23, 2005 inception price,” according to a Seeking Alpha analysis of the ETF.
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The good news is that the U.S. economy moving into the late-cycle phase, overall growth may slow and signs of an economic slowdown could pop up. Consequently, investors may also turn to defensive sectors that are less economically sensitive, such as health care.
The Affordable Care Act has helped millions of Americans receive healthcare coverage, with the uninsured rate now at a seven-year low, bolstering the outlook for healthcare services and sector-related exchange traded funds.
PJP “trades at about 3.35 times book value and the return on equity is respectable at 11.79%. So if the devil on one shoulder is urging you to jump in, it’s better to listen to the angel on the other, suggesting a little patience,” adds Seeking Alpha.
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PowerShares Dynamic Pharmaceuticals Portfolio
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.