3 Pharma ETFs for a Sickly Market

What happened to the good old days... when the markets were only down or up 100? Where did the 1% daily fluctuations of early 2008 go... as if that wasn't stomach churning enough?

Now 200 point swings are everyday occurrences, 300 point moves happen 2 or 3 times per week, and 400+ is not out of the question. In fact, the CBOE Volatility Index [VIX] is looking to push yet another all-time high near 50 as I type!

As hard as anyone may try to remain level-headed about this bear... the idea of buying when everyone else is panicky seems antiquated. Right now, anyway. Clearly, you would need nerves of steel to do anything more than hide under a desk.

Panic aside, there are great companies for the non-mattress money. If you're going to look out more than a year or two, you'd have a tough time convincing anyone that Merck, Pfizer, J&J and Bristol Myers are all going out of business. And yet, they're trading with 4%+ dividends and forward P/Es that used to excite investors.

3 ETFs capture pharma -- 2 traditional and one unit investment trust called Pharma HOLDRs (PPH). PPH has a few advantages with more frequent dividend payouts and very robust volume.

That said, PPH has been handily beaten by the less well-known vehicles, SPDR Pharmaceuticals (XPH) and the iShares DJ Pharma Index Fund (IHE). While all 3 exchange-traded pharma funds have outperformed the S&P 500, XPH and IHE have been far superior in 2008.

The primary reason that PPH is down more than the others is its construction. PPH has more than 50% in Merck, Pfizer and J&J alone. In fact, HOLDRS do not rebalance holdings. It follows that the large weighting in ailing Merck and Pfizer has been enough to offset the rebound in J&J and/or other up-n-coming pharma companies like Barr Pharmaceuticals Inc.

For greater diversification across the drug delivery space, the IHE captures nearly 40 companies that collectively boast 1/2 the volatility of the broader market. (So what does that mean in today's world... 2% up or down daily as opposed to 4%!!!)

The yield, however, is rather disappointing. Many of these companies individually offer dividends that exceed 30-year treasuries. Collectively, IHE isn't offering much more than the 1.8% expected from the S&P 500 SPDR Trust (SPY).

What about XPH? The dividend yield is even less attractive here, but the near equal weighting across a highly concentrated 20-25 companies has given XPH an edge.

In truth, Pharma ETFs are not as enticing as I'd like. Even though they have outperformed broader-based health care in the short run, I gotta have some yield. It's like the Saturday Night Live skit with needing "more cow bell." I need some more yield for the risk.

How can you get it? Take a gander at Global Health Care (IXJ) over 3 years. It's had the same type of run as pharma. And yet, going forward, the 3.3% yield will enhance your likelihood of success.

Disclosure Statement: ETF Expert is a web log ("blog") that makes the world of ETFs easier to understand. Pacific Park Financial, Inc., a Registered Investment Advisor with the SEC, may hold positions in the ETFs, mutual funds and/or index funds mentioned above. Investors who are interested in money management services may visit the Pacific Park Financial, Inc. web site.