Exchange traded funds dedicated to pharmaceuticals makers took their lumps during the March/April biotechnology swoon, but a biotech resurgence coupled with ongoing strength in blue chip pharmaceuticals names lifted several ETFs to all-time highs last Friday.
One of those funds was the PowerShares Dynamic Pharmaceuticals Portfolio (NYSEArca: PJP). There are several dedicated pharma ETFs and while that may imply some level of saturation in terms of ETFs for this particular industry, it is worth noting these funds employ different methodologies.
There are cap-weighted and equal-weight pharma ETFs, but PJP employs a more pure approach to intelligent indexing with a combination emphasis on momentum and quality. Those two themes are increasingly prominent when it comes to ETF indexing. [Index Swap Lifts These Sector ETFs]
PJP tracks the Dynamic Pharmaceutical Intellidex Index which evaluates companies for inclusion based on “price momentum, earnings momentum, quality, management action, and value,” according to PowerShares.
When investors hear “momentum” pertaining to a health care ETF, the typical reaction is that the fund in question is either heavily tilted toward biotech names, small-caps or both. However, that is not necessarily the case with PJP.
Just over a quarter of the ETF’s 29 holdings are small-caps and just 23.6% of the fund’s weight is allocated to biotech issues. [Big Rebound for Momo Tech ETF]
Although it may be a begrudging admission for some, it cannot be denied that for a while now, blue chip phama stocks have offered a compelling manifestation of the momentum and quality themes. Many investors know that a company like Johnson & Johnson (NYSE: JNJ) has rewarded investors with decades of dividend increases, a sure sign of quality.
However, momentum also means favorable price action, not just biotech or social media stocks. Consider this: The Dow Jones Industrial Average hit a new all-time high Friday, but just six of its 30 components are up at least 10% this year. Two of those six are Johnson & Johnson and Merck (NYSE: MRK).
Abbott Labs (NYSE: ABT) is not a Dow stock, but it fits the bill as a quality stock and is up almost 7% this year. Same goes for Eli Lilly (NYSE: LLY), which is up a staggering 22.3% this year. Those four stocks combine for almost 18% of PJP’s weight, underscoring the notion that the ETF is benefiting from momentum from stocks often perceived as slow-moving. [Fun With Pharma ETFs]
Unbeknownst to some investors, PJP has over $1.1 billion in assets under management and is the 12th-best PowerShares ETF in terms of 2014 inflows, according to issuer data.
PowerShares Dynamic Pharmaceuticals Portfolio
