Broadly speaking, the healthcare sector remains a laggard relative to the broader market. As of Aug. 28, the S&P Select Sector Health Care Index was trailing the S&P 500 by 310 basis points on a year-to-date basis. However, hope isn’t lost for the S&P 500’s third-largest sector weight.
Take the case of the VanEck Pharmaceutical ETF (PPH ). The $716.75 million PPH turns 13 years old in December. It is one of a small number of healthcare ETFs offering notable out-performance. As of Aug. 28, PPH is up an impressive 22.2% since the start of the year – a gain achieved with less annualized volatility than the S&P 500 and the S&P Select Sector Health Care Index.
PPH’s star status among healthcare ETFs this year prompts questions about why the fund is a leader. Investors are right to ask. In the case of PPH, the leadership is born out of having the right holdings. Additionally, its roster is not confined to domestic pharmaceuticals stocks. Obviously, that methodology is working as the VanEck ETF is beating the S&P Pharmaceuticals Select Industry Index by a 3-to-1 margin this year.
PPH Has the Right Stuff in Healthcare
Shares of some US-based pharmaceuticals are struggling this year. Some reasons are lack of exposure to weight-loss drugs and investor concerns about looming patent cliffs. PPH addresses those issues. It has strong exposure to makers of GLP-1s and more than 43% of its portfolio is comprised of ex-US firms.
“GLP-1s are a notable exception to our U.S. pharma aversion. We believe these promising new therapies for diabetes and weight loss have ample runway as they just begin their success journey,” according to BlackRock research.
Many market observers believe GLP-1s such as Ozempic, Wegovy and Zepbound are just scratching the surface of long-term total addressable market potential. In fact, Eli Lilly (LLY), PPH’s largest holding, recently said it will sell Zepbound directly to consumers whose insurance plans don’t cover the drug to meet robust demand.
PPH’s international exposure could benefit investors. Not only are many European pharma companies trading at attractive multiples, those companies aren’t facing many of the headwinds their U.S. rivals are confronting.
“In general, these companies face a much less severe patent issue and have better drug pipelines, offering greater return potential and quality on a par with U.S. counterparts,” added BlackRock.
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