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Overview
VanEck Pharmaceutical ETF (NASDAQ:PPH) is postured as a solid buying opportunity for investors seeking diversification in the healthcare sector due to its mix of holdings, strong recent performance, and comparatively high dividend yield. PPH seeks to replicate the MVIS U.S. Listed Pharmaceutical 25 Index including companies in pharmaceutical research, development, production, and marketing. While most healthcare stocks may not see the eye-popping performance of big tech stocks, VanEck’s Pharmaceutical ETF is postured for solid growth that beats competitor ETFs and has a low correlation to the volatility of the market overall. Finally, for income seekers, PPH boasts a dividend yield higher than the S&P 500 index and its ETF competitors.
The Right Mix Of Holdings
A key strength of VanEck’s Pharmaceutical ETF lies in its blend of holdings, specifically its top three – Eli Lilly (LLY), Novo Nordisk (NVO), and Johnson & Johnson (JNJ). The top holding for PPH is Eli Lilly which has seen a 54% increase in share price YTD. This impressive increase can be predominantly credited due to its FDA-approved diabetes drug, Mounjaro, which has been shown to be effective for weight loss.
Notably, PPH is the only large pharmaceutical ETF that contains NVO. The Danish Pharmaceutical company recently stole headlines with medical sensations, Ozempic and Wegovy. Ozempic, used to treat type 2 diabetes, and Wegovy, used for weight loss, sent Novo Nordisk’s stock up 40% YTD. Simultaneously, shockwaves hit companies like Costco and Coca-Cola, threatening consumer demand. Even Walmart, a bastion of consumer staples, has seen an impact. Walmart’s CEO stated in early October that they are seeing “a slight pullback” due to weight loss drugs.
Top Holdings Comparison of Large Pharmaceutical ETFs
|
Fund |
Top Holdings |
|
VanEck Pharmaceutical ETF |
LLY (8.4%), NVO (6.4%), JNJ (6.1%) |
|
Health Care Select Sector SPDR Fund ETF (XLV) |
UNH (10.5%), LLY (9.8%), JNJ (7.7%) |
|
iShares U.S. Pharmaceuticals ETF (IHE) |
LLY (25.8%), JNJ (23.7%), MRK (4.8%) |
|
Invesco Pharmaceuticals ETF (PJP) |
|
|
Vanguard Health Care Index Fund ETF Shares (VHT) |
UNH (8.5%), LLY (7.8%), JNJ (6.8%) |
Importantly, PPH is not overly exposed to one specific holding. In contrast, iShares U.S. Pharmaceuticals ETF, has over 25% weight on LLY. Despite Eli Lilly’s recent strong performance, risks exist with any one pharmaceutical company, as seen with past lawsuits and side effects for specific pharmaceutical products. PPH’s holding of dividend king Johnson & Johnson acts as a stabilizing function to augment the rapid growth of LLY and NVO. Therefore, those seeking exposure to NVO, LLY, and the pharmaceutical industry’s recent successes at large, while maintaining diversification, may be able to achieve their goals with PPH.
Performance History
As a testament to PPH’s strong holdings mix, its one-year performance has been superior to competitor ETFs. While UnitedHealth Group, the top holding for XLV and VHT, saw solid third quarter results including 14% year-over-year revenue growth, PPH’s top holdings have seen even greater revenue growth. Due to Mounjaro’s success, Eli Lilly saw a 28% increase in Q2 revenue which is not expected to slow in coming quarters. Furthermore, NVO’s third quarter revenue growth presented a 34% year-over-year increase.
One-Year Performance Comparison: Large Pharmaceutical ETFs
|
Fund |
1-Year Return (%) |
5-Year Total Return (%) |
|
VanEck Pharmaceutical ETF |
3.5 |
25.2 |
|
Health Care Select Sector SPDR Fund ETF |
-6.8 |
40.0 |
|
iShares U.S. Pharmaceuticals ETF |
-6.8 |
8.9 |
|
Invesco Pharmaceuticals ETF |
-10.7% |
3.1 |
|
Vanguard Health Care Index Fund ETF Shares |
-8.0% |
34.9 |
Given NVO’s expected continued revenue growth from Ozempic and Wegovy, any pharmaceutical ETF that does not contain NVO may be left in the dust. Aside from recent weight loss drug successes, PPH has demonstrated solid long-term performance. According to VanEck’s fund details, the ETF has shown an average 10-year average return of over 7% and lifetime average return of over 9%.
Performance History: Average Annual Total Returns (%)
|
Month End as of 9/30/23 |
10-Year Avg. Return |
Life (12/20/11) |
|
VanEck Pharmaceutical ETF (NAV) |
7.24 |
9.17 |
|
VanEck Pharmaceutical ETF (Share Price) |
7.26 |
9.26 |
Dividend Yield And Other Comparison Factors
Beyond advantages in holdings and one-year performance, PPH also has the highest dividend yield (2.2%) of comparable ETFs. As a noteworthy downside, PPH has a high expense ratio which may be undesirable for low-cost investors. However, PPH’s expense ratio is comparable to competitor pharmaceutical ETFs, even low-cost champion, Vanguard, at 0.10%.
|
Fund |
Expense Ratio |
Dividend Yield |
|
VanEck Pharmaceutical ETF |
0.36% |
2.20% |
|
Healthcare Select Sector Fund SPDR Fund |
0.10% |
1.73% |
|
iShares U.S. Pharmaceutical ETF |
0.40% |
2.01% |
|
Invesco Pharmaceutical ETF |
0.58% |
1.10% |
|
Vanguard Healthcare ETF |
0.10% |
1.57% |
With $425 million in assets under management (AUM), PPH has one of the highest AUMs of pharmaceutical ETFs, only smaller than XLV ($37 billion) and VHT ($16 billion). One alluring quality of all pharmaceutical ETFs is their low correlation to the market as a whole. PPH has a 3-year beta value of 0.63 compared to the S&P 500 index. This beta value is comparable with VHT (0.71), XLV (0.68), IHE (0.54), and PJP (0.54).
Looking Forward: Risk versus Reward
PPH, like the pharmaceutical industry at large, is not without potential risks. The Journal of the American Medical Association found that users of Ozempic and Wegovy may be at risk of severe stomach issues. A lawsuit earlier this year included both Novo Nordisk and Eli Lilly involving claims of patients developing stomach paralysis, called gastroparesis. While the lawsuit and rare side effects have not derailed Novo Nordisk and Eli Lilly’s strong revenues, an increase in cases could impact the products’ standings in the weight loss market.
The second risk is regarding long-term demand. While over 40% of Americans are obese and a large base of eager consumers exist, experts have stated that most people only use Ozempic or Wegovy for one year. Several theories exist on why demand lasts a year or less including side effects, a “plateau” in results, and an overall shortage of products.
Despite the risks above, the top holdings for PPH are primed for continued growth. Just earlier this month, Eli Lilly announced the acquisition of Mablink Bioscience, a company transforming cancer therapy. With increasing demand for diabetes and obesity drugs, Novo Nordisk is also postured for strong growth.
Concluding Summary
While risks remain for VanEck’s Pharmaceutical ETF’s top holdings, the growth of its heaviest holdings is undeniable. PPH is the only large pharmaceutical ETF that contains NVO, one of the best-performing pharmaceutical companies year-to-date. PPH also has the highest dividend yield and 1-year return of similar ETFs with a competitive long-term return and expense ratio. While investors may see greater long-term returns in other sectors, pharmaceuticals have shown a low correlation to the market as a whole. Therefore, PPH may allow investors to capitalize on future revenues for weight loss drugs and provide a dividend yield higher than the S&P 500 index, all while offsetting overall market volatility.
