Pharmaceuticals companies, even the old, large-cap variety, are innovators in their own right. They have to be.

For investors, the good news is that the innovation outlook for some of the largest names in the biopharma space looks attractive, and that could provide fuel for upside in exchange traded funds, including the Invesco Dynamic Pharmaceuticals ETF (NYSEArca: PJP).

“Fitch Ratings expects the global pharmaceutical & biotech industry to build upon its strong innovation momentum displayed in its Covid-19 response. Partnership models established across key parts of the industry’s value chain, such as research & development (R&D), supply and manufacturing, will accelerate,” writes the research firm in a recent note.

PJP follows the Dynamic Pharmaceutical Intellidex Index, providing investors with a unique view of this industry. PJP’s underlying index evaluates companies based on price momentum, earnings momentum, quality, management action, and value.

That unique methodology allows the $429.6 million PJP to offer investors exposure to both the defensive and growth traits offered by pharmaceuticals stocks.

“The sector’s defensive qualities are underpinned by its strong innovation pipeline, combined with still significant unmet medical needs, steady demand from growing and ageing populations and improving healthcare access globally,” adds Fitch.

One of the primary reasons that investors love pharmaceuticals equities is quality — as in, strong balance sheets and dependable dividends. For its part, PJP has a dividend yield of 0.99%, implying ample room for growth.

“We project healthy free cash flow generation that will improve for many companies as recent innovations achieve critical mass and mature, while generics business models benefit from recent investments in scale and lower-cost production,” notes Fitch. “We do not expect immediate pressure to increase shareholder returns in the sector, but this may build for some issuers over time if there are no suitable investment opportunities for external growth.”

PJP holds 27 stocks, including several companies that are heavily involved in the coronavirus vaccine space.

“Fitch estimates that vaccine supply shortages will abate from 2Q22, shifting the focus in the global vaccination effort to the efficient delivery and administration of vaccines in weaker emerging-market healthcare systems. The rating Outlooks of two leading Fitch-rated vaccine manufacturers, Pfizer (A/Stable) and AstraZeneca (BBB+/Positive), will be influenced by how the companies incorporate continued vaccine efforts into their different economic models,” concludes Fitch.

Pfizer is PJP’s largest holding at a weight of 6.37%.

For more news, information, and strategy, visit the ETF Education 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.