PJP - IHE: You Better Like Eli Lilly And Johnson & Johnson To Buy This

2023-11-06 15:44:53 ET

Summary

• The iShares U.S. Pharmaceuticals ETF provides targeted exposure to the U.S. pharmaceutical industry but has a highly concentrated portfolio.
• The IHE ETF's top five holdings, including Eli Lilly and Johnson & Johnson, account for over 63% of the fund's total assets, posing a concentration risk.
• Compared to its peers, IHE has a lower expense ratio but higher concentration of holdings, which may increase risk for investors.

The Pharmaceutical industry forms a crucial part of the global economy. With an ever-growing demand for healthcare services and new drugs, investing in this sector provides an opportunity to capitalize on its growth potential. And while exchange-traded funds, or ETFs, are a great wrapper to gain access to these stocks, always look under the hood to know what you're buying and to assess just how diversified a basket of stocks truly is. The iShares U.S. Pharmaceuticals ETF ( IHE ) by its name alone isn't exactly as diversified as one might think.

IHE is an exchange-traded fund that aims to track the investment performance of an index comprising of U.S. equities in the pharmaceuticals sector. Launched on May 1, 2006, by BlackRock Fund Advisors, the fund offers investors a targeted approach to gain exposure to the U.S. pharmaceutical industry.

IHE strives to reflect the performance of the Dow Jones U.S. Select Pharmaceuticals Index, its benchmark index. This index provides exposure to companies involved in various aspects of the pharmaceutical industry, from product research and drug development to the manufacturing of prescription or over-the-counter drugs and vaccines.

A Look at IHE's Holdings

Here's the problem. IHE's portfolio is highly concentrated, with a significant portion of its assets invested in its top holdings. The fund's top five holdings were:

1. Eli Lilly ( LLY ): 25.16%
2. Johnson & Johnson ( JNJ ): 23.76%
3. Merck & Co., Inc. ( MRK ): 4.82%
4. Royalty Pharma plc ( RPRX ): 4.77%
5. Viatris Inc. ( VTRS ): 4.54%.

This ETF is driven largely by just two stocks: LLY and JNJ. These top five holdings account for over 63% of the fund's total assets, indicating a high degree of concentration risk.

If you're bullish on IHE, you better be bullish on these names individually.

Comparing IHE with its Peers

IHE faces competition from several similar funds. Two notable ones include the Invesco Dynamic Pharmaceuticals ETF ( PJP ) and VanEck Vectors Pharmaceutical ETF ( PPH ). PJP tracks the Dynamic Pharmaceutical Intellidex Index and has assets worth $252 million with an expense ratio of 0.57%. On the other hand, PPH tracks the MVIS US Listed Pharmaceutical 25 Index and manages assets worth $385 million with an expense ratio of 0.36%. In comparison, IHE has a lower expense ratio of 0.40% and manages $550 in net assets. However, the concentration of holdings in IHE is much higher than its peers, which could pose an additional layer of risk for investors.

Performance and Risk Analysis

IHE has been very choppy since 2021, largely going nowhere as technology momentum continues to take center stage. I think the Pharmaceutical space likely does do well long term, but right now it's really difficult to find a spot to position confidently in.

Conclusion: Is IHE a Good Investment?

Investing in IHE offers a strategic way to gain exposure to the pharmaceutical sector. With a strong portfolio of holdings and a low expense ratio, IHE presents an attractive proposition. However, the high concentration of its holdings in two large-cap pharmaceutical stocks introduces a lot of company specific risk in an otherwise good long-term investment thesis.

iShares U.S. Pharmaceuticals ETF is a pass for me. Just think that there's too much company-specific risk.

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