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) 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 30
th
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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Research? Today, you can download
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.
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GUGG-SP5 EW HEA (RYH): ETF Research Reports
SPDR-HLTH CR (XLV): ETF Research Reports
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Research
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