Pharmaceutical ETFs Are Health Care Sector Standouts

The health care sector has been on fire in 2014, as investors continue to bet on the development of new drugs and increased need for medical services.

On Tuesday, the pharmaceuticals industry received a vote of confidence, after both Pfizer Inc PFE and Merck & Co. MRK reported better than expected earnings. Both stocks moved higher on this positive news and in turn provided a tailwind for several ETFs that have core exposure to this group.

The Market Vectors Pharmaceutical ETF PPH provides exposure to 25 of the largest and most liquid U.S.-listed pharmaceutical companies. Both PFE and MRK are in the top holdings of this fund, which charges an expense ratio of 0.35 percent. PPH currently has more than $320 million in total assets and a 30-day SEC yield of 1.87 percent.

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So far this year, PPH has gained 17.28 percent versus a gain of 12.84 percent in the benchmark Health Care Select Sector SPDR XLV. This strong momentum makes PPH the best performing health care ETF, to-date, in 2014. 

PPH has benefitted from its exposure to the largest companies in this group, along with 40 percent of the portfolio dedicated to European equities trading on U.S. exchanges.

Another well-known ETF in this space that takes a more fundamental approach is the PowerShares Dynamic Pharmaceuticals Portfolio PJP. This ETF is based on an index that selects companies by monitoring a variety of investment merit criteria, including price momentum, earnings momentum, quality, management action and value.

PJP includes exposure to both large- and small-cap holdings, which allows it to capture a wider swath of the health care universe. This fund currently has more than $1.1 billion in total assets and charges an expense ratio of 0.63 percent.

So far this year, PJP has gained 12.89 percent, as recent volatility in the biotech sector has led to a modest pullback. However, additional positive earnings announcements combined with a strong fundamental backdrop for the health care sector may lead to further growth this year.