The healthcare sector isn’t setting the investment world ablaze this year, but it is outperforming the broader market, underscoring its defense posture. A significant portion of the good news resulting from the sector’s 2022 weakness is that a slew of quality stocks are now on sale, enhancing the appeal of exchange traded funds such as the VanEck Vectors Pharmaceutical ETF (PPH).
PPH follows the MVIS US Listed Pharmaceutical 25 Index and holds 25 healthcare equities.
Of interest to investors considering healthcare exposure, PPH is home to some highly rated healthcare stocks, indicating it provides efficient exposure to the second-largest sector in the S&P 500 while removing the stock picking burden.
“The strongest long-term opportunities for healthcare companies primarily fall in three industries: drug manufacturing, medical devices, and diagnostics and research,” notes Morningstar analyst Benjamin Slupecki. “And all 20 of the best healthcare companies to invest in have intangible assets that provide a wide moat against competitors. This intangible-asset advantage is often derived from either patents or proprietary technology.”
As its name implies, PPH is a pharmaceutical-focused ETF, but some of its holdings have exposure to diagnostics, research, and medical devices. For example, Dow component Johnson & Johnson (NYSE: JNJ) has one of the largest medical device divisions in the world. That’s PPH’s largest holding at a weight of 9.18%.
JNJ’s “wide moat is “supported by intellectual property in the drug group … and strong brand power from the consumer group. Despite carrying some lower-margin divisions, J&J maintains strong pricing power and has posted gross margins above 70% during the past four years, validating its strong competitive position,” says Morningstar analyst Damien Conover.
PPH’s exposure to European healthcare names is relevant because some of those stocks have enviable quality traits, including steady dividend growth and strong balance sheets. Some, including Novo Nordisk (NYSE: NVO), have impressive product pipelines and compelling growth avenues. That stock accounts for 5.13% of the PPH portfolio.
“Novo Nordisk is the leading provider of diabetes-care products in the world, holding 50% of world market share. The company has two moat sources: intangible assets and cost advantage,” adds Slupecki.
More than half of the 20 stocks on Morningstar’s “best of” healthcare list, including JNJ and Novo Nordisk, are PPH member firms. Other members of that group include Bristol-Myers Squibb (NYSE: BMY), Eli Lilly (NYSE: LLY), and Dow component Merck (NYSE: MRK).
For more news, information, and strategy, visit the Beyond Basic Beta Channel.
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.