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Make Money in Pharmaceuticals the Easy Way

Exchange-traded funds offer a convenient way to invest in sectors or niches that interest you. If you expect the pharmaceutical industry to thrive as the world's growing population ages, the SPDR S&P Pharmaceuticals (NYSE: XPH  ) ETF could save you a lot of trouble. Instead of trying to figure out which companies will perform best, you can use this ETF to invest in several dozen of them simultaneously.

The basics
ETFs often sport lower expense ratios than their mutual fund cousins. The Medical Devices ETF's expense ratio -- its annual fee -- is a low 0.35%.

This ETF has performed reasonably, but it's also very young, with just four years on the books. It underperformed the S&P 500 in 2007, but has topped it in each of the past three years. As with most investments, we can't expect outstanding performances in every quarter or year. Investors with conviction need to wait for their holdings to deliver. With a moderate turnover rate of 47%, this fund isn't frantically rejiggering its holdings, as many funds do.

What's in it?
Several of this ETF's components made strong contributions to its performance over the past year. AVANIR Pharmaceuticals (Nasdaq: AVNR  ) , for example, has gained 76% in that period, with investors excited about the FDA's approval of Nuedexta, a treatment for pseudobulbar affect (PBA). Jazz Pharmaceuticals  (Nasdaq: JAZZ  ) , maker of narcolepsy drug Xylem and OCD drug Luvox, gained 143% over the past year as its revenue soared. Questcor Pharmaceuticals (Nasdaq: QCOR  ) , treating central nervous system disorders such as multiple sclerosis, is up some 74%.

Other companies hurt the ETF's returns last year, but could have a more positive impact in the years to come. Vivus (Nasdaq: VVUS  ) , down 30% over the past year, is hoping to gain FDA approval for an anti-obesity treatment, though the FDA has expressed some safety concerns. Nektar Therapeutics (Nasdaq: NKTR  ) has also posted weak performance, dropping about 44% in the past year.

The big picture
Demand for pharmaceuticals won't go away anytime soon. A well-chosen ETF can grant you instant diversification across the industry -- and make investing in and profiting from the sector that much easier.

Keep your eye on these investments by adding them to your watchlist:

ETFs can help you find the way to better investing results. To find some great ETF investing ideas, take a look at The Motley Fool's special free report, "3 ETFs Set to Soar During the Recovery."

Editor's Note: A previous version of this article incorrectly attributed Nektar's stock performance to the drug Exubera. The Fool regrets the error.

Longtime Fool contributor Selena Maranjian does not own shares of any companies mentioned in this article. Try any of our investing newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool is Fools writing for Fools.

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 26, 2011, at 12:48 PM, prpent wrote:

    qcor overcharging for treatment will be victim of their greed

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