Despite the U.S. being one of the major markets for healthcare and one of the largest spenders on public health, the healthcare sector, particularly the pharmaceutical industry, is not experiencing the best of times.
This has been mainly thanks to the stiff competition within the sector as generic competition and a lack of new products is hurting the outlook for many firms. Furthermore, many of the billion dollar drugs from years past are also approaching the end of their patents, suggesting that the outlook for the segment could be quite weak (read Two ETFs for the Muddle Through Economy).
Adding to the worries of the pharmaceutical industry is the support of the Obama administration to generics. The administration seeks to implement a proposal which would make the industry more competitive by giving generics a head start to enter the industry by reducing entry barriers for them.
Nevertheless, despite these challenges the sector has shown great resilience. Traditionally, the healthcare sector as a whole is considered to be a defensive one, since the stock prices of companies from these sectors have less variation than most companies from other sectors (read ETFs for the Most Competitive Countries on Earth).
This has been a major advantage for them in this current market environment, and it has allowed a few firms to hold steady. Given this, a look to some of the top ranked ETFs in the space could be the way to target the best of the segment with lower levels of risk. .
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, Zacks Rank reflects the expected return of an ETF relative to other ETFs with similar level of risk.
Using this strategy, we have found one ETF which is Ranked 1 or ‘Strong Buy’ with this, model in the pharmaceutical industry which we have highlighted in greater detail below:
SPDR S&P Pharmaceuticals ETF (XPH)
Launched in June of 2006, SPDR S&P Pharmaceuticals Fund (XPH) is an exchange traded fund (ETF) designed to provide a broad exposure to the U.S. equity market with a core focus on the pharmaceutical segment of the Healthcare sector.
XPH tracks the Pharmaceuticals Select Industry Index before fees and expenses. The index is modified equal weighted, which measures the performance of stocks from the entire spectrum of market capitalization (read Health Care ETFs in Focus on Obamacare Supreme Court Decision).
This ETF is appropriate for investors seeking broad exposure to the pharmaceutical segment of the U.S. Healthcare sector. XPH provides a targeted bet on one of the most defensive sectors in the U.S markets (i.e. Healthcare) which has attracted investors’ attention and confidence amidst global economic uncertainties and despite reduced margins of companies from the sector.
It charges a low expense ratio of 0.35% compared to a category average of 0.56%.
XPH has a narrow investment theme as it only tracks stocks from the pharmaceutical industry of the broader Healthcare sector. From an individual holdings point of view, it holds 30 securities. The ETF employs a modified equal weighting methodology, and does well in allocating around 46% of its total assets in the top 10 sectors.
Companies like Viropharma Inc, (5.39%), Medicis Pharmaceutical Corp (4.83%), Watson Pharmaceuticals Inc (4.51%), and Questcor Pharmaceuticals Inc (4.44%), are among some of its top holdings. Heavyweights like Johnson & Johnson and Pfizer Inc are also represented, having been allocated 4.25% and 4.20%, respectively, of the fund (see more in the Zacks ETF Center).
XPH has returned an impressive 16% YTD, slightly outperforming the broad markets over the time frame. This can be best explained by the fact that the healthcare sector due to its defensive nature has provided a safe haven for investors at a period when the equity markets were witnessing massive sell-offs. Still on a one year look, the fund is holding up even better with a gain of over 30% in the trailing 52 weeks (read 4 International ETFs Yielding more than 5%).
Also, its high allocations to mid and small cap stocks has caused it to outperform the broader market. However, this comes with a moderate risk premium as its annualized standard deviation (23.56%) is slightly higher than traditional healthcare ETFs.
Still, we find this fund to be a lower risk choice when compared to other pharma ETFs so for investors looking for a top ranked choice in the health care market, XPH could be it.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report >>