Pharmaceutical ETFs are performing admirably this year, but one of the more compelling members of that group is the First Trust Nasdaq Pharmaceuticals ETF (NasdaqGM: FTXH).
FTXH tracks an index based on modified factor-weighted indices designed to provide exposure to U.S. economic sector based on three factors: 3, 6, 9, and 12-month average price appreciation; cash flow to price; and expected volatility based on 12-month historical stock price fluctuation.
That is to say, FTXH isn’t cap-weighted and that’s alright.
“While cap-weighted strategies tap into the market’s collective wisdom, FTXH’s methodology could be a better mousetrap for investors seeking reduced volatility while not paying up for growth,” notes Nasdaq.
The fund has other benefits for investors to consider, too.
“What makes FTXH’s 2020 showing impressive is that among the fund’s 29 holdings, not many are directly involved in the Coronavirus vaccine competition. For example, the fund stands as a rare example of a pharmaceuticals/biotech ETF that’s performing admirably in 2020 without exposure to Moderna (MRNA),” according to Nasdaq. “In fact, FTXH features no allocation to Moderna. Likewise, the fund isn’t being driven by some of the speculative small-cap names that seemingly move on all COVID-19 headlines.”
Pharma Power
Healthcare stocks, at least for now, have appeared to shake out of the politically-induced doldrums seen earlier this year and FTXH’s compelling growth/value mix could prove attractive over the near-term. However, some market observers believe the sector isn’t risk-free with a presidential election year looming in 2020.
“We think Joe Biden’s moderate position and status as the presumptive Democratic presidential nominee reduces the likelihood of significant drug pricing policy changes, despite more-aggressive reform recommendations from the Biden-Sanders unity task force,” said Morningstar in a recent note.
One reason to consider FTX, which is heavy on politically sensitive biotech and pharmaceutical stocks, is that much of the political risk weighing on the healthcare sector this year may already be baked into the group. And yes, the First Trust fund does have some exposure to the fight against the novel coronavirus.
“For example, Johnson & Johnson (JNJ), Pfizer (PFE), and Abbott Labs (ABT) combine for over 19% of FTXH’s roster. JNJ and Pfizer are among the companies furthest along in the COVID-19 vaccine race while Abbott is higher by 15.35% this year due in large part to its dominance in the market for coronavirus testing,” according to Nasdaq.
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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.