Best Pharmaceutical ETFs for Q1 2022

Pharmaceutical exchange-traded funds (ETFs) offer investors access to a basket of U.S.-based and foreign stocks of drug manufacturers and related companies in a single investment. These companies discover, develop, and produce medications used to cure disease, vaccinate, or alleviate symptoms of illness. Pharmaceutical stocks include Pfizer Inc. (PFE) and Merck & Co. Inc. (MRK), two major drug companies, as well as biotech firms and smaller, fast-growing names. Many of these ETFs are dominated by Chinese companies.

Pharmaceutical ETFs allow investors to share in the profits earned across the sector while avoiding the idiosyncratic risks of investing in individual stocks. The industry currently is more attractive to many investors because of the worldwide race among pharmaceutical companies to either develop new vaccines to treat COVID-19 or distribute COVID-19 vaccines already approved by regulatory agencies.

On Oct. 29, 2021, the U.S. Food and Drug Administration (FDA) authorized the emergency use of the Pfizer-BioNTech COVID-19 vaccine for children 5 through 11 years of age. The FDA previously approved the same vaccine for individuals 16 years and older in August 2021, making it the first COVID-19 vaccine to receive full approval. At that time it also issued an emergency use authorization for this vaccine for individuals 12-15 years old.

Key Takeaways

  • The pharmaceutical industry underperformed the broader market over the past year.
  • The pharmaceutical exchange-traded funds (ETFs) with the best one-year trailing total returns are PJP, PPH, and IHE.
  • The top holdings of these ETFs are Merck & Co. Inc., class B sponsored ADRs of Novo Nordisk A/S, and Johnson & Johnson, respectively.

The pharmaceutical ETF universe is composed of six ETFs that trade in the United States, excluding inverse and leveraged ETFs as well as those with less than $50 million in assets under management (AUM). The pharmaceutical industry has underperformed the broader market in the past year. As of Nov. 16, 2021, the S&P 500, had a one-year trailing total return of 32.1%. By contrast, the U.S.-centered benchmark, the S&P 1500 Pharmaceuticals Industry Index, had a one-year trailing total return of 22.6% during that period. And the global benchmark, the MSCI ACWI Pharmaceuticals Index, had a one-year trailing total return of 17.1%. The best performing pharmaceutical ETF is the Invesco Dynamic Pharmaceuticals ETF (PJP).

Below, we’ll take a look at the top three pharmaceutical ETFs as measured by one-year trailing total returns. All numbers below are as of Nov. 16, 2021.

Invesco Dynamic Pharmaceuticals ETF (PJP)

  • One-Year Trailing Total Returns: 22.0%
  • Expense Ratio: 0.58%
  • Annual Dividend Yield: 0.75%
  • Three-Month Average Daily Volume: 21,115
  • Assets Under Management: $440.3 million
  • Inception Date: June 23, 2005
  • Issuing Company: Invesco

PJP is a multi-cap fund that targets the Dynamic Pharmaceutical Intellidex Index. The index is composed of 30 U.S. pharmaceutical stocks selected for capital appreciation potential based on factors including price momentum, earnings momentum, quality, management action, and value. The companies comprising the index are engaged in the research, development, manufacture, sale or distribution of pharmaceuticals and drugs of all types.

Nearly 58.0% of the fund’s assets are invested in the top 10 holdings, making it highly concentrated in the largest positions. The top holdings for PJP include Merck & Co. Inc. (MRK), a pharmaceutical company; Abbott Laboratories (ABT), a medical devices and healthcare company; and Pfizer Inc. (PFE), a pharmaceutical company.

VanEck Pharmaceutical ETF (PPH)

  • One-Year Trailing Total Returns: 17.7%
  • Expense Ratio: 0.35%
  • Annual Dividend Yield: 1.63%
  • Three-Month Average Daily Volume: 32,277
  • Assets Under Management: $342.3 million
  • Inception Date: Dec. 20, 2011
  • Issuing Company: VanEck

PPH is a multi-cap, blended fund that tracks the MVIS US Listed Pharmaceutical 25 Index. The index is composed of companies involved in pharmaceuticals, including pharmaceutical research and development as well as production, marketing, and sales of pharmaceutical products. The fund can include both domestic and U.S.-listed foreign companies, which currently make up about a third of the portfolio.

The top holdings of PPH include class B sponsored American depositary receipts (ADRs) of Novo Nordisk A/S (NVO), a Danish pharmaceutical company; Merck & Co. Inc.; and Pfizer Inc.

iShares U.S. Pharmaceuticals ETF (IHE)

  • One-Year Trailing Total Returns: 14.1%
  • Expense Ratio: 0.42%
  • Annual Dividend Yield: 1.39%
  • Three-Month Average Daily Volume: 5,271
  • Assets Under Management: $390.1 million
  • Inception Date: May 1, 2006
  • Issuing Company: BlackRock Financial Management

IHE is a multi-cap growth fund targeting the Dow Jones U.S. Select Pharmaceuticals Index. The index is composed of U.S. companies that manufacture prescription drugs, over-the-counter (OTC) drugs, or vaccines.

IHE is highly concentrated in a small number of holdings, with the top 10 positions accounting for nearly 78% of invested assets. The top three holdings alone account for more than 47% of assets. These holdings are Johnson & Johnson (JNJ), a producer of medical devices, pharmaceuticals, and related products, and Pfizer and Merck.

The comments, opinions, and analyses expressed herein are for informational purposes only and should not be considered individual investment advice or recommendations to invest in any security or adopt any investment strategy. While we believe the information provided herein is reliable, we do not warrant its accuracy or completeness. The views and strategies described in our content may not be suitable for all investors. Because market and economic conditions are subject to rapid change, all comments, opinions, and analyses contained within our content are rendered as of the date of the posting and may change without notice. The material is not intended as a complete analysis of every material fact regarding any country, region, market, industry, investment, or strategy.

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