Rare are the investments that can deliver staggering returns over multiple years or even a decade. The PowerShares Dynamic Pharmaceuticals Portfolio (NYSEArca: PJP) and other pharmaceuticals exchange traded funds have done just that.
However, part of the long-running ebullience for pharmaceuticals stocks and ETFs has been a fairly sanguine political environment. With a presidential election year looming, that could change.
“The reality is that there’s no regulation without legislation. More specifically, there’s no legal way for a sitting president, or any political candidate for that matter, to regulate drug pricing in the United States. Only a change in current laws could do that! And bipartisan legislative action is highly unlikely for at least the next two years or for that matter, perhaps even longer,” according to a Seeking Alpha post.
PJP is a departure from the traditional market capitalization-weighted health care ETF in that its underlying index evaluates companies for inclusion based on “price momentum, earnings momentum, quality, management action, and value,” according to PowerShares. [A Strong Pharma ETF]
“PJP tracks an industry with seemingly endless demand from an aging population looking to live forever. What gave it the edge over its biotech peers is that it is concentrated in only 30 companies. ETFs with such a small number of holdings tend to do really well—or really poorly,” reports Eric Balchunas for Bloomberg.
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 Swaps Lift Sector ETFs]
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.
“The other reality is that financial fundamentals are better than ever for biopharmaceutical companies. Business models, product offerings, pipelines, and management quality are considerably better now than they were 10 years ago, resulting in sustainable earnings growth for these companies that is superior to most other sectors of the S&P 500. Another key point is that earnings are stable, as are earnings estimates and guidance. While some stock prices are down more than 20% since mid-summer highs, valuations are attractive and, in fact, quite compelling on a PEG (price earnings per unit of earnings growth) basis,” notes the Seeking Alpha post.
PowerShares Dynamic Pharmaceuticals Portfolio
