In this article, we discuss the 12 best pharma ETFs. If you want to skip our discussion on the pharma industry, you can go directly to the 5 Best Pharma ETFs.
As of 2023, Deloitte has valued the pharmaceutical, biotechnology, and medical technology industries at $2.83 trillion. A report on the Global Pharmaceuticals Outlook by Atradius highlights China’s emergence as a key player in the global pharmaceutical industry. The number of households in the country with an annual income of $35,000 is expected to increase from 65 million in 2020 to 152 million by 2026. This is expected to provide impetus to the demand for high-value pharmaceuticals. In addition to this, China’s aging population is also expected to drive demand and benefit some of the best pharma stocks, such as Pfizer Inc. (NYSE:PFE), Merck & Co., Inc. (NYSE:MRK), and AbbVie Inc. (NYSE:ABBV). You can also check out the 10 Best Small Cap Pharma Stocks to Buy here.
Meanwhile, the US pharmaceutical market is observing a dynamic change as the country disclosed a pricing shift under the Inflation Reduction Act (IRA). Medicare would now have the ability to negotiate drug prices with the manufacturers and enforce inflationary rebates from pharmaceutical companies. According to the legislation, the US national insurer could potentially negotiate the prices for up to 10 drugs by 2026, and this number could increase to 60 by 2029. The IRA has given the power to the government to impose an excise duty of up to 95% on companies that do not engage in negotiations.
Growth Trajectory
Experts believe that mergers and acquisitions could be a highlight for the pharmaceutical industry in the coming years. PricewaterhouseCoopers (PwC) anticipates a series of deals falling within the $20 billion to $40 billion range in 2023, largely driven by the robust financial positions and liquidity of pharmaceutical companies. Experts in the field identify oncology and immunology as areas with substantial growth potential, which also emphasizes the investment opportunities in the pharmaceutical industry.
For investors seeking exposure to the pharmaceutical sector, ETFs have proven to be a reliable option. Among these, the VanEck Pharmaceutical ETF (NASDAQ:PPH) has established a reputation as one of the top-performing ETFs over the past five years. Another ETF that has performed well in the past five years is the Vanguard Health Care Index Fund (NYSEARCA:VHT), also known as Vanguard Pharma ETF amongst retail investors. Notably, the Health Care Select Sector SPDR Fund (NYSEARCA:XLV) holds the distinction of being the largest pharma ETF, featuring many prominent pharmaceutical industry names. You can also explore the 12 Best Biotech ETFs To Buy for additional investment opportunities in the biotechnology sector.
12 Best Pharma ETFs
Photo by Myriam Zilles on Unsplash
Our Methodology
We have shortlisted the 12 best pharma ETFs based on their historical five-year performance as of September 11. The best pharma ETFs also provide exposure to industries like biotechnology, clinical trials, and immunotherapy. The ETFs have been ranked in ascending order of their 5-year performance.
12. iShares U.S. Pharmaceuticals ETF (NYSEARCA:IHE)
5-Year Performance as of September 11, 2023: 14.7%
Total Net Assets as of September 11, 2023: $373.82 million
Expense Ratio: 0.40%
iShares U.S. Pharmaceuticals ETF (NYSEARCA:IHE) is managed by New York-based BlackRock, Inc. (NYSE:BLK), which is one of the biggest asset management companies globally. Overall, the ETF has 40 holdings. The ETF intends to replicate the performance of the Dow Jones US Select Pharmaceuticals Index as it plans to invest at least 80% of its assets in the securities of the underlying index.
The three biggest holdings of the iShares U.S. Pharmaceuticals ETF (NYSEARCA:IHE) are Eli Lilly and Company (NYSE:LLY), Johnson & Johnson (NYSE:JNJ), and Zoetis Inc. (NYSE:ZTS). Together, the three biggest holdings occupy 50.51% of the fund's portfolio.
Here’s what Baron Funds said about Eli Lilly and Company (NYSE:LLY) in its Q2 2023 investor letter:
“Eli Lilly and Company (NYSE:LLY) is a global pharmaceutical company developing and marketing drugs in oncology, diabetes, Alzheimers, immunology, and other diseases. Shares climbed due to continued investor excitement around novel weight loss drugs in the GLP-1 class, including Lilly’s Mounjaro. Given demand that is orders of magnitude more than supply, the full potential of the GLP-1 class of drugs remains unclear, with sales projections eclipsing $100 billion. This number would set a new industry record by a large margin. Drug development in this space is understandably fierce, and as recently as late June, Eli Lilly revealed new data from its diabetes/obesity pipeline assets that will further enhance the value proposition offered to patients. We retain conviction.
11. First Trust NASDAQ Pharmaceuticals ETF (NASDAQ:FTXH)
5-Year Performance as of September 11, 2023: 15.6%
Total Net Assets as of September 11, 2023: $22.56 million
Expense Ratio: 0.60%
First Trust NASDAQ Pharmaceuticals ETF (NASDAQ:FTXH) intends to replicate the performance of the underlying NASDAQ US Smart Pharmaceutical Index, with a correlation of 95%.
Johnson & Johnson (NYSE:JNJ), Merck & Co., Inc. (NYSE:MRK), and AbbVie Inc. (NYSE:ABBV) are the three biggest constituents of the ETF, representing 21.72% of the portfolio. Overall, First Trust NASDAQ Pharmaceuticals ETF (NASDAQ:FTXH) has 45 holdings. Between 2017 and 2022, the ETF generated the highest annual return of 22.35% in 2019.
10. Global X Aging Population ETF (NASDAQ:LNGR)
5-Year Performance as of September 11, 2023: 25.1%
Total Net Assets as of September 11, 2023: $40.12 million
Expense Ratio: 0.50%
Global X Aging Population ETF (NASDAQ:LNGR) is based on the mandate that average human lives are getting longer with every passing day. According to the forecasts presented by the World Health Organization (WHO) in October 2021, there would be 2 billion people above the age of 60 by 2050. As the senior population rises, especially in the Western hemisphere, they would require creative solutions that cater to their preferences. These diverse solutions are expected to have a significant impact across various sectors and strongly benefit the pharmaceutical industry.
Eli Lilly and Company (NYSE:LLY), Chugai Pharmaceutical Co., Ltd. (4519.T), and Alcon Inc. (NYSE:ALC) are the three biggest holdings of the ETF, representing 11.85% of the portfolio. Of the 910 hedge funds in Insider Monkey’s database, 25 funds held a stake in Alcon Inc. (NYSE:ALC) as of Q2 2023.
“Alcon Inc. (NYSE:ALC), the eye care devices, equipment and consumables provider, was also a leading contributor during the quarter. In addition to a backdrop of resilient and robust demand across all of its segments, Alcon’s focus on executing its commercial strategy, pricing improvements and product development demonstrates the strength of the business. As an innovative leader in the eye care industry, Alcon develops cutting‐edge products such as Total30, the first reusable lenses using water gradient technology created for astigmatic wearers, and the ARGOS Biometer, which enables surgeons to conduct 3D digital image‐ guided cataract surgery. Products such as these have allowed Alcon to further penetrate its primary end markets and win market share from competitors. While the company continues to navigate challenges such as inflation and supply‐chain inefficiencies, we believe Alcon’s prudent decisions that have helped maintain operational efficiency, its thoughtful approach to acquisitions, and the advantageous industry dynamics highlight the high‐quality nature of the company and the long‐term sustainability of its business model.”
9. First Trust Health Care AlphaDEX Fund (NYSEARCA:FXH)
5-Year Performance as of September 11, 2023: 26.87%
Total Net Assets as of September 11, 2023: $1.52 billion
Expense Ratio: 0.61%
First Trust Health Care AlphaDEX Fund (NYSEARCA:FXH) tracks and replicates the performance of the StrataQuant Health Care AlphaDEX Index.
The ETF is designed to provide investors with exposure to the companies involved in various aspects of the healthcare industry, such as pharmaceuticals, biotechnology, medical devices, and healthcare providers. Excluding cash, the ETF has 85 holdings. Medpace Holdings, Inc. (NASDAQ:MEDP), Viatris Inc. (NASDAQ:VTRS), and Encompass Health Corporation (NYSE:EHC) are the three biggest holdings of First Trust Health Care AlphaDEX Fund (NYSEARCA:FXH). Collectively, these three companies account for 6.64% of the total holdings.
8. iShares U.S. Healthcare Providers ETF (NYSEARCA:IHF)
5-Year Performance as of September 11, 2023: 27.15%
Total Net Assets as of September 11, 2023: $998.33 million
Expense Ratio: 0.40%
iShares U.S. Healthcare Providers ETF (NYSEARCA:IHF) seeks to track the investment results of US equities in the healthcare providers sector. It is another ETF on our list of the best pharma ETFs that are managed by BlackRock, Inc. (NYSE:BLK). The primary objective of the iShares U.S. Healthcare Providers ETF (NYSEARCA:IHF) is to replicate the performance of the Dow Jones US Select Healthcare Providers Index.
7. VanEck Pharmaceutical ETF (NASDAQ:PPH)
5-Year Performance as of September 11, 2023: 29.09%
Total Net Assets as of September 11, 2023: $373.03 million
Expense Ratio: 0.36%
VanEck Pharmaceutical ETF (NASDAQ:PPH) intends to track the performance of the MVIS US-Listed Pharmaceutical 25 Index. Excluding cash, the ETF has 25 holdings. VanEck Pharmaceutical ETF (NASDAQ:PPH) has an average price-to-earnings (P/E) ratio of 17.22x for the past twelve months and an average 12-month price-to-book (P/B) ratio of 2.54x.
Eli Lilly and Company (NYSE:LLY), Teva Pharmaceutical Industries Limited (NYSE:TEVA), AbbVie Inc. (NYSE:ABBV), and Novo Nordisk A/S (NYSE:NVO) are the four biggest member constituents of the ETF and take up 22.38% of the portfolio.
Here's what Rowan Street Capital said about Novo Nordisk A/S (NYSE:NVO) in its Q2 2023 investor letter:
“Our current portfolio is made up of just 10 companies — we are very focused! We described our ‘10-Player All-Star Team’ philosophy in our Q1 2018 Letter (we encourage you to review it). We have been building this portfolio since our founding in 2015. In total, over the past 8 years, we bought stock in 47 different companies (that’s ~6 per year), and obviously, for anyone who is good at arithmetic, we sold 37 of them (~4.6 per year). We are constantly trying to learn from every decision (good or bad) that we make. We went through every position that we’ve sold since 2015 and analyzed how we would have done had we held on to those positions. The top 3 performing positions would have been: Chipotle (CMG) +630%, Tractor Supply (TSCO) +315% and Novo Nordisk A/S (NYSE:NVO) +387%. Your managers are at fault here because we sold all of these (in 2017-18) for non-fundamental reasons. All of these continued to be great businesses and management has executed at very high levels. In all three cases, we made a decision to sell because we thought the stock price got way ahead of itself.
6. Vanguard Health Care Index Fund (NYSEARCA:VHT)
5-Year Performance as of September 11, 2023: 37.96%
Total Net Assets as of September 11, 2023: $20.13 billion
Expense Ratio: 0.10%
Vanguard Health Care Index Fund (NYSEARCA:VHT) is offered by Vanguard Group, one of the world's largest and most well-known investment management companies. The Vanguard Health Care ETF seeks to track the performance of the US Investable Market Health Care 25/50 Index, which is a market-capitalization-weighted index representing the healthcare sector in the US.
UnitedHealth Group Incorporated (NYSE:UNH), Johnson & Johnson (NYSE:JNJ), and Eli Lilly and Company (NYSE:LLY) are the three biggest holdings of Vanguard Health Care Index Fund (NYSEARCA:VHT) and occupy 21.91% of the overall portfolio. The ETF has a 27.50% exposure to the pharmaceutical sector.
In addition to Vanguard Health Care Index Fund (NYSEARCA:VHT), best pharma stocks such as Pfizer Inc. (NYSE:PFE), Merck & Co., Inc. (NYSE:MRK), and AbbVie Inc. (NYSE:ABBV) are also attracting significant investor attention.
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