ETF Showdown: A Pharma Fight
Much has been made of low volatility sectors leading U.S. equities to new all-time highs. Sectors such as consumer staples and utilities are driving the broader market higher.
Health care is certainly in the conversation as well, and it is not just biotech names that are leading this sector's charge higher. Conservative investors have been rewarded as well.
Investors have some compelling options when it comes to exposure to a broad swath of pharmaceuticals stocks via ETFs, but the leaders in this group this year have been the Market Vectors Pharmaceuticals ETF (NYSE: PPH) and the PowerShares Dynamic Pharmaceuticals Portfolio (NYSE: PJP). The names of these ETFs imply obvious similarities, but a closer examination reveals a match-up worthy of an ETF showdown.
At the superficial level, PJP is the larger of the two funds with nearly twice the assets under management ($457.3 million) as PPH has ($229.7 million). PPH, however, is the cheaper of the two with an expense ratio of 0.35 percent compared to 0.63 percent of PJP. PJP also has average daily volume that is more than double that of PPH's (over 100,000 shares compared to 45,300 shares for PPH).
More importantly, there are significant differences regarding how these ETFs go about their daily business. With PPH, investors are getting more a pure-play on blue-chip pharmaceuticals stocks. PPH is home to 26 stocks, nearly of all of which can be considered large-cap value names. Johnson & Johnson, Pfizer and Novartis (NYSE: NVS) combine for nearly a third of the ETF's weight.
Although PJP is not much in terms of total holdings at 30, the ETF is spread more evenly. Yes, PJP is home to usual pharmaceuticals suspects. Bristol-Myers Squibb (NYSE: BMY), Pfizer, Merck and Johnson & Johnson are all found among the ETF's top-10 holdings. However, that quartet represents just over 20 percent of PJP's weight.
Additionally, PJP offers noteworthy biotech exposure. In fact, the ETF's two largest holdings are Amgen (NASDAQ: AMGN) and Gilead Sciences (NASDAQ: GILD). Nearly a third of PJP's holdings can be classified as biotech stocks rather than traditional pharma names.
With biotech stocks and ETFs surging higher this year, it is likely PJP's exposure to that sector that has helped it slightly outpace PPH year-to-date. On that basis, PJP is higher by 16.2 percent compared to 15.8 percent for PPH as of April 10.
Of course, the tradeoff with the higher weight to biotech found in PJP is that the ETF's volatility has been higher than PPH's this year, according to ETF Replay data.
In terms of valuation, PJP compares favorably with PPH. The former has a P/E ratio of 15.48 and a price-to-book ratio of 3.38, according to PowerShares data. PPH has a P/E of 19.1 and a price-to-book ratio of three.
Due to the duplication among U.S.-based blue-chip pharmaceuticals names, it does not make sense for investors to own PJP and PPH simultaneously. Deciding between the two boils down to what individual investors want: Biotech exposure or a heavier concentration on stodgier pharma fare. With that in mind, this ETF Showdown is a draw.
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