Write a Prescription for this Pharmaceuticals ETF

The coronavirus pandemic is supporting an array of healthcare exchange traded funds this year, even some that aren't heavily geared to diagnostics makers and vaccine developers.

With dozens of healthcare ETFs for investors to choose from, it's not surprising that many are leaning on familiar fare while some smaller but impressive options fall through the cracks. The First Trust Nasdaq Pharmaceuticals ETF (FTXH) is in the latter category, but that's not a knock on this ETF. After hitting an all-time high on Thursday on what was a dismal day for the broader market, FTXH is up 4% year-to-date compared to a 3.12% decline by the S&P Pharmaceuticals Select Industry Index.

What makes FTXH's 2020 showing impressive is that among the fund's 29 holdings, not many are directly involved in the coroanvirus vaccine competition. For example, the fund stands as a rare example of a pharmaceuticals/biotech ETF that's performing admirably in 2020 without exposure to Moderna (MRNA).

In fact, FTXH features no allocation to Moderna. Likewise, the fund isn't being driven by some of the speculative small-cap names that seemingly move on all COVID-19 headlines.

Conservative Call, Meaningful Methodology

The median market value of FTXH's components is $6.10 billion, putting the First Trust fund firmly in mid-cap territory. However, that doesn't necessarily imply a higher degree of risk because many of the fund's largest holdings, including those providing coronavirus investment exposure, are classified as large-cap, quality healthcare names.

For example, Johnson & Johnson (JNJ), Pfizer (PFE) and Abbott Labs (ABT) combine for over 19% of FTXH's roster. JNJ and Pfizer are among the companies furthest along in the COVID-19 vaccine race while Abbott is higher by 15.35% this year due in large part to its dominance in the market for coronavirus testing.

Another source of allure with FTXH is its methodology, which comes by way of its benchmark, the Nasdaq US Smart Pharmaceuticals Index. That is to say FTXH isn't a run-of-the-mill cap-weighted ETF.

That index weights components based 12-month price fluctuation (volatility), value and growth. However, the value and growth factors are applied in unique fashion with value being sourced by way of cash flow to price, not price-to-book or price-to-earnings. Growth is measured by three-, six-, nine- and 12-month price appreciation.

While cap-weighted strategies tap into the market's collective wisdom, FTXH's methodology could be a better mousetrap for investors seeking reduced volatility while not paying up for growth.

Political Considerations

Healthcare is one of the most politically sensitive sectors on the market and that's especially true of the pharmaceuticals group. That cannot be overlooked with 2020 being a presidential election year, but FTXH and its pharma ETF peers earlier this year dealt with harsh political pressure, indicating those clouds have parted.

“We think Joe Biden’s moderate position and status as the presumptive Democratic presidential nominee reduces the likelihood of significant drug pricing policy changes, despite more-aggressive reform recommendations from the Biden-Sanders unity task force,” said Morningstar in a recent note.

Bottom line: FTXH is a “right for the environment” pharma ETF consideration because it doesn't need a coronavirus vaccine to emerge tomorrow or a specific political outcome to deliver upside for investors and those are traits worth embracing.

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

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