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Don Dion's Weekly ETF Blog Wrap

Here is some of what Don Dion blogged about on RealMoney this past week.

Two Ways to Play a Rise in Pharma

Posted 12/03/2009 2:45 p.m. EST

Health care reform is withering in the Senate, and other matters have distracted the president. The pharmaceutical sector is poised to benefit.

With Obama focusing on the current economic situation and the war in Afghanistan, there is a good chance that the health care reform bill will stall. With lawmakers distracted, this is a prime time for investors looking for exposure to the health care sector to jump in. However, when deciding which fund to include in your portfolio, numerous options are available.

In the case of pharmaceuticals, two particularly strong options are the iShares Dow Jones U.S. Pharmaceuticals Index Fund (IHE) and the SPDR S&P Pharmaceuticals ETF (XPH). Both instruments provide investors with direct access to some of the most dominant drug companies around. Their differences, however, have caused them to vary in performance.

Year to date for the period ending Dec. 2, IHE has gained nearly 30%, while XPH has jumped 24%.

Because a small number of big-name firms dominate the pharmaceutical arena, both funds hold many identical firms in their top holdings. Some names include Merck (MRK - Get Report), Pfizer (PFE - Get Report), Eli Lilly (LLY - Get Report) and Abbott Laboratories (ABT - Get Report). The top 10 holdings of XPH represent close to 50% of the fund's total portfolio. For IHE, the largest weighted firms make up over 60%.

While IHE appears more heavily weighted looking its top firms, in total, the fund has 31 total holdings; XPH has 22.

XPH gains a leg up, however, when it comes to fees. Investors holding IHE face a 0.48% expense ratio vs. XPH's 0.36%.

When it comes down to it, although XPH is cheaper and is less top-heavy than IHE, it's the performance that matters. While both funds will likely perform well as health care reform flounders, I would advise investors to stick to IHE for the best play on the pharmaceutical industry.

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FXY $90.49 -0.48%
XPH $41.56 -1.80%
IHE $140.00 -0.93%
EWJ $11.46 -0.56%
ABT $38.25 -0.78%


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