A Pharma ETF Focused On Quality, Fast-Growing Stocks

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D rugmakers delivered tasty returns to investors in July. Pharmaceutical ETFs topped peers holding broadly diversified health care stocks as well as those focused on red-hot biotechs.

PowerShares Dynamic Pharmaceuticals ( PJP ) lags its pharma ETF peers this month despite a 3.6% rise. But it leads year to date with a 22% advance, and over longer periods.

It produced an annual average 35% gain over five years vs. 30% forSPDR S&P Pharmaceuticals ( XPH ).

The $2.14 billion ETF holds several IBD Sector Leaders in its 24-stock portfolio, includingAllergan ( AGN ),Akorn ( AKRX ),Gilead ( GILD ) andLannett (LCI). Megacap leadersJohnson & Johnson (JNJ),Merck (MRK) andPfizer (PFE) are also found here. Pharmaceuticals account for 72% of assets and biotechs 22%.

PJP screens for holdings based on price momentum, earnings momentum, quality, management and value. It skews towards large-cap and growth stocks, and rebalances quarterly.

XPH tracks an equal-weighted index. As a result, this $1.16 billion ETF skews more towards small- and midcaps. But its 39 stock holdings still include the likes of Pfizer and J&J.

XPH has a 0.35% expense ratio vs. 0.58% for PJP.

"The pharmaceutical industry is enjoying a secular tailwind propelled by the aging population," writes Morningstar analyst Robert Goldsborough. "Big Pharma growth rates have turned around after patent losses peaked in 2012. Pharmaceutical firms also should benefit from improving pipelines and cost-cutting."

With recent view-topping earnings reports, they're proving their mettle for successful investing . Gilead gained 2% Wednesday after crushing earnings estimates and raising sales guidance. The California-based company, an HIV drug leader, is now a formidable player in the hepatitis C market with its blockbuster Sovaldi.

Amgen (AMGN), the No. 3 holding in PJP, reports today. No. 1 holdingDepomed (DEPO) reported Wednesday. The maker of pain medication beat views on Q2 revenue and raised guidance.

Biotechs, generic-drug makers and ethical-drug makers are ranked in the top 10 among 197 industry groups tracked by IBD. Both PJP and XPH fell on the stock market today .

Follow Aparna Narayanan on Twitter: @IBD_ANarayanan .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , ETFs
Referenced Symbols: PJP , XPH , AGN , AKRX , GILD

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