While there have been a series of volatility-inducing events in the U.S. starting from the Fed’s ‘Taper Talk’ and then the tussle between the Republicans and the Democrats, investors have still remained relatively bullish and have put capital to work in the equity markets.
While many sectors have persevered in this environment, one segment looks well-positioned for future gains, the pharma/biotech space (Read: Top Sector ETFs to Watch in Q3 Earnings Season).
This sector is one of the most desirable avenues for parking investments when markets are heading south. Thanks to the incredible performances of major drug companies and increased M&A activities in both pharmaceutical and biotechnology industries investors have been attracted to this corner of the market.
Moreover, the demand for healthcare services usually remains unchanged even during an economic downturn and investments in this sector provide sufficient protection to the capital invested (Read: Play Surging Health Care with These Small Cap ETFs).
Below we have mentioned the positive and negative trends that the biotechnology & pharmaceutical industry face:
The positive trends which drive this sector mainly include: an ageing population, people surviving longer with chronic diseases, an increase in merger & acquisition activities (M&A) and technology revolutions (Read: 2 Great Healthcare ETFs in Focus).
While there are some positives about this sector, a few nagging events which still worry investors include: reduction in R&D activity, U.S. Food and Drug Administration (:FDA) uncertainties, downsizing and restructurings, pricing pressure, generic competition and patent cliffs.
Still, thanks to the extremely positive demographic factors, and the strong momentum in the space, investments in these sectors may be a solid play. For those seeking to bet on this trend, we have listed a few ETFs from the biotech & pharma industries for the daring investors who want to place their bets in this high-profit and high-risk sector:
Top Biotech ETFs in Focus
PowerShares Dynamic Biotech & Genome (PBE)
Launched in June 2005, PBE tracks the performance of the Dynamic Biotechnology & Genome Intellidex Index and invests in common stocks of biotechnology companies and genome companies comprising the index. It has an AUM of $218.6 million.
The fund holds about 29 stocks in its portfolio and is skewed towards growth stocks. In terms of market cap, large cap stocks take almost a 40% share in the fund while mid-cap and small-cap securities share the rest.
From an individual holding point of view, some of the top holdings include Regeneron Pharmaceuticals, Biogen Idec and Gilead Sciences Inc. though no single security accounts for more than 6.2% of the total.
PBE may not be rich in AUM, but it has beaten the titans in the category. However, the product trades in a somewhat sparse volume of just 37,000 shares a day and charges 63 bps in fees (Read: 3 Impressive Biotech ETFs Crushing the Market).
Market Vectors Biotech ETF (BBH)
Launched in December 2011, BBH is a passively managed fund and tracks the performance of the Market Vectors U.S. Listed Biotech 25 Index. The fund normally invests in small and medium-capitalization companies and foreign companies which comprise the index and are listed on a U.S. exchange. To date, the product has amassed $415.7 million in assets. (Read: The Best ETFs in Market’s top sector).
With holdings of 26 stocks, the fund is highly concentrated in the top 10 holdings which account for about 65% of its total assets. In terms of market cap, large cap stocks take almost a 64% share in the fund while mid-cap takes 32% and small-cap securities share the rest. Style-wise, BBH is tilted more towards growth stocks, while a thin share is taken by value stocks.
From an individual holding point of view, the top 3 fund holdings are Gilead Sciences Inc., Amgen Inc. and Celgene Corp. with as asset share of 13%, 11.20% and 8.41%, respectively.
The product trades in an average daily volume of 105,400 shares a day. The fund is easy on the pocketbook, charging investors 35 bps in fees, which is lower than the category average of 46bps. (Read: Is the Biotech Sector Still a Market Leader?).
Top Pharmaceutical ETFs in focus
PowerShares Dynamic Pharmaceuticals (PJP)
Launched in June 2005, PJP tracks the Dynamic Pharmaceuticals Intellidex Index. The fund normally invests at least 90% of its total assets in common stocks comprising the index. So far the ETF has amassed $691.5 million in assets.
The fund holds about 28 securities in its basket, and from an individual security perspective, the top 3 company holdings are Bristol-Myers Squibb Co, Celgene Corp and Gilead Sciences Inc. While the ETF is tilted towards growth stocks, it allocates a thin share to value funds as well (Read: The Comprehensive Guide to Pharmaceutical ETFs).
The fund’s expense ratio is 0.63% while the dividend yield is 1.15%. The trading volume is roughly 141,700 shares per day.
SPDR S&P Pharmaceuticals (XPH)
Launched in June 2006, XPH tracks the S&P Pharmaceuticals Select Industry Index. The product has amassed $553.1 million in assets.
The ETF holds about 31 securities in total and is totally dedicated to the pharma sector with the top 3 holdings being Bristol-Myers Squibb Co., Perrigo Co. and Actavis plc.
The fund charges 35bps in fees and has a dividend yield of 0.81%. The trading volume is roughly 67,000 shares per day.
The Bottom Line
While the long-term outlook remains promising for the pharma & biotech ETFs, investors should note that investing in the healthcare sector requires a multifaceted approach to get a hang of its underlying drivers.
Both the industries will continue to grow no matter what happens with rates, especially given the demographic shift in the U.S. and the insatiable demand for new treatments and drugs for a variety of illnesses.
Moreover, the space will likely be a bright spot going forward as the U.S. is one of the major markets for healthcare and one of the largest spenders on public health, putting the sector in an advantageous position (Find all Health Care ETFs).
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