The healthcare sector will continue to see political attention in the remainder of 2018, with the 2017 U.S. tax reform bill influencing it in a number of ways. Its repeal of mandated healthcare is likely to change demand and effect provider participation. Industry experts believe the Republicans will also continue to take further actions on Obamacare provisions, seeking new changes. Meanwhile, the lower tax rate will benefit corporate America and offer a significant advantage for pharmaceutical research and development.

Drug pricing and market competition will continue to be key political areas of focus for drug manufacturers, particularly ahead of the mid-term elections. Pfizer and other major drug makers have recently raised prices, as tends to occur in the summer months, analysts say, as they try to offset the impact of both slowing sales growth and their stocks underperforming the broader market.

However, on the positive side, the pharmaceutical sector is one industry with tremendous potential to gain from tax cost savings poured into research and development. Across the globe, drug pricing will be a factor and the U.S.’s new tax advantage will help both large and small U.S. pharmaceutical drug manufacturers. The new landscape adds new opportunity to the sector for investors interested in pharmaceutical investments.

Exchange-traded funds (ETFs) can be a great way to take advantage of these new opportunities with professional portfolio management and diversification across specific areas of the market.

Below we have selected the top five pharmaceutical ETFs based on results for 2017 and the first 9 months of 2018. All figures are correct, as of October 11, 2018. These funds rallied in 2017 and after struggling in a narrow range for the first half of 2018, they have started to move higher over the last 3 months. Whether they continue rising in the last few months of 2018, or suffer another setback, all represent solid picks for the long term.

1. First Trust Nasdaq Pharmaceuticals ETF (FTXH)

  • Issuer: First Trust
  • Avg. Volume: 5,056
  • Net Assets: $3.52 million
  • Dividend Yield: 0.59%
  • 2017 Return: 19.41%
  • 2018 YTD Return: 10.41%
  • Expense Ratio: 0.60%
  • Price: $22.28

FTXH is a pharmaceuticals ETF offered by First Trust. The ETF uses a replication approach to track the holdings and return of the Nasdaq U.S. Smart Pharmaceuticals Index. The Nasdaq U.S. Smart Pharmaceuticals Index is a customized index which focuses on U.S. companies. The Index includes the 30 most liquid pharmaceuticals stocks from the NASDAQ U.S. Benchmark Index. It then uses screening criteria and index weighting to manage the overall composition of the Index. The 30 stocks are screened and ranked by the following criteria: volatility – trailing 12-month price fluctuation, value – cash flow to price, and growth – the 3-, 6-, 9-, and 12-month average price appreciation. The results offer a customized investment approach for the sector.

In 2017, the Fund was the top performing ETF in the pharmaceutical sector with a YTD return of 19.41%. In 2018, the fund has struggled along with the rest of the sector, but remains a solid choice longer term. The Fund was launched in September 2016 and has $3.52 million in assets under management.

2. Invesco Dynamic Pharmaceuticals ETF (PJP)

  • Issuer: Invesco
  • Avg. Volume: 36,346
  • Net Assets: $584.44 million
  • Dividend Yield: 0.59%
  • 2017 Return: 15.30%
  • 2018 YTD Return: 15.10%
  • Expense Ratio: 0.57%
  • Price: $67.97

PJP follows the Dynamic Pharmaceutical Intellidex Index. The money managers of this fund try to keep 90% of all assets in stocks that are in this index. Note that the Intellidex Index has 32 U.S. pharmaceuticals companies and that the Index itself is designed for capital appreciation in the sector through company evaluation by specific investment criteria. The Index’s investment criteria includes: price momentum, earnings momentum, quality, management action and value.

In 2017, PJP had a YTD return of 15.30%. The Fund was launched in 2005. It has a ten-year annualized total return of 17.41%.

3. VanEck Vectors Pharmaceutical ETF (PPH)

  • Issuer: VanEck
  • Avg. Volume: 27,346
  • Net Assets: $276.05 million
  • Dividend Yield: 1.58%
  • 2017 Return: 15.22%
  • 2018 YTD Return: 9.74%
  • Expense Ratio: 0.35%
  • Price: $60.61

The VanEck Vectors Pharmaceutical ETF offers exposure to healthcare companies globally. The Fund uses an index replication approach and seeks to track the holdings and return of the MVIS U.S. Listed Pharmaceutical 25 Index. This Fund invests in 25 pharmaceutical companies with a concentration primarily in the U.S. but also includes companies from the United Kingdom, Denmark, Switzerland and France.

The MVIS U.S. Listed Pharmaceutical 25 Index includes the 25 largest and most actively traded stocks in the global pharmaceutical industry. In 2017, PPH had a YTD return of 15.22%. Launched in December 2011 its three-year and five-year annualized total returns are 2.80% and 8.20% respectively.

4. VanEck Vectors Generic Drugs ETF (GNRX)

  • Issuer: VanEck
  • Avg. Volume: 431
  • Net Assets: $3.91 million
  • Dividend Yield: 0.63%
  • 2017 Return: 13.98%
  • 2018 YTD Return: 7.73%
  • Expense Ratio: 0.57%
  • Price: $25.60

In the pharmaceutical industry, generic drugs make demand highly competitive. The VanEck Vectors Generic Drugs ETF offers investors exposure to top companies in the pharmaceutical industry focused on generic drug manufacturing. This ETF seeks to replicate the holdings and performance of the Indxx Global Generics & New Pharma Index which is comprised of companies generating revenue primarily from generic drugs. The Fund invests across generic drug companies globally with a significant portion of the Fund’s investments in U.S. companies at 31%. Top holdings in the Fund include Mylan and Teva Pharmaceutical Industries Ltd.

In 2017, GNRX had a YTD return of 13.98%. So far, in 2018 it has struggled but has recently moved higher. It is currently up close to 8%. This fund was launched in January 2016.

5. SPDR S&P Pharmaceuticals ETF (XPH)

  • Issuer: State Street SPDR
  • Avg. Volume: 94,527
  • Net Assets: $403.1 million
  • Dividend Yield: 0.86%
  • 2017 Return: 12.05%
  • 2018 YTD Return: 12.36%
  • Expense Ratio: 0.35%
  • Price: $43.82

The SPDR S&P Pharmaceuticals ETF offers a portfolio of U.S. pharmaceutical stocks from the S&P Total Market Index. This Fund seeks to track the holdings and return of U.S. pharmaceutical companies by replicating the S&P Pharmaceuticals Select Industry Index. This index draws from the broad U.S. S&P Total Market Index. Therefore, securities in the Index represent nearly all of the U.S. pharmaceutical stocks found in the U.S. GICS pharmaceuticals sub-industry.

In 2017, XPH returned 12.05%. In 2018, the fund is up over 12%. Launched in June 2006, the Fund has a ten-year annualized total return of 14.51%.

The Bottom Line

Investors have a lot to watch in the pharmaceutical industry in 2018. Research and technology development can have a huge impact on these companies. Artificial intelligence, biotech and new cross industry partnerships will be factors as the industry evolves. In addition, political oversight will continue to influence supply, demand and business operations.

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