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
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
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
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 (
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
Health Care ETFs in Focus on Obamacare Supreme
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
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
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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.
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SPDR-SP PHARMA (XPH): ETF Research Reports
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