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Shares of Actavis (NYSE: ACT), the generic drugmaker with an attractive Irish domicile, jumped 2.4% to a new record high on volume that was more than double the daily average Tuesday on speculation Dow component Pfizer (NYSE: PFE) is mulling a takeover of Actavis.

Pfizer has previously displayed a thirst for mega-deals, attempting to acquire AstraZeneca (NYSE: AZN) for $114 billion before dropping the bid in May. Should Pfizer’s interest in Actavis, a stock widely held by hedge funds, intensify and become formalized, several already high-flying pharmaceuticals ETFs could benefit.

For example, the $533 million iShares U.S. Pharmaceuticals ETF (NYSEArca: IHE) has an almost 5.4% weight to Actavis while the nearly $385 million Market Vectors Pharmaceutical ETF (NYSEArca: PPH) devotes 4.4% to the stock.

With both ETFs being home to Allergan (NYSE: AGN), Salix Pharmaceuticals (NasdaqGS: SLXP) and Perrigo (NasdaqGS: PRGO), among others, neither IHE nor PPH are lacking for potential takeover targets. However, that brings up another issue regarding why investors should assess the fundamentals of the pharmaceuticals industry before buying the aforementioned ETFs and others rather than banking on the possibility these ETFs will rise solely due to mergers and acquisitions activity. [ETFs for a Salix Takeover]

Combining the debate over decrepit U.S. tax policy and recent mergers and acquisitions activity in the health care sector, it is not a stretch to say Pfizer prizes Actavis for the latter’s Irish domicile, one garnered by acquiring Warner Chilcott Plc last year.

The U.S. Treasury Department intends to make it harder for U.S. companies to move their headquarters abroad as a way diminish taxes owed, or also known as inversion, Bloomberg reports.

More recently, inversions have occurred after large U.S. companies merged with smaller foreign firms. The U.S. company would reincorporate in a tax-friendlier country, like Ireland, while maintaining much of their core operations in the U.S. [Inversion Debate Affects Health Care ETFs]

Investors should note a Pfizer move on Actavis is not the only inversion-related deal that could affect pharma ETFs. AbbVie (NYSE: ABBV), which agreed to acquire Dublin-based Shire (NasdaqGS: SPHG), fell Tuesday on inversion news. AbbVie and Shire combine for 8.4% of PPH’s weight.

The PowerShares DWA Healthcare Momentum Portfolio (NYSEArca: PTH) has an almost 4.7% weight to Actavis. Although the ETF, one backed by a strategy that focuses on identifying stocks with impressive relative strength, is chock full of takeover, its current roster offers less inversion risk than some other health care ETFs. PTH has remained durable in the face of increased inversion talk, gaining 3% over the past month.

Market Vectors Pharmaceutical ETF


ETF Trends editorial team contributed to this post.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.