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Exchange-traded funds offer a convenient way to invest in sectors or niches that interest you. If you expect the pharmaceutical industry to thrive over time as our global population grows and ages, the iShares Dow Jones US Pharmaceuticals ETF (NYSE: IHE  ) 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 lots of them simultaneously.

The basics
ETFs often sport lower expense ratios than their mutual fund cousins. The iShares ETF's expense ratio -- its annual fee -- is a relatively low 0.47%.

This ETF has performed rather well, beating the world market handily over the past three and five years. As with most investments, of course, we can't expect outstanding performances in every quarter or year. Investors with conviction need to wait for their holdings to deliver.

With a low turnover rate of 18%, this fund isn't frantically and frequently rejiggering its holdings, as many funds do.

What's in it?
More than a handful of pharmaceutical companies had strong performances over the past year. VIVUS (Nasdaq: VVUS  ) , up about 174%, is an excellent example. It recently received Food and Drug Administration approval for its weight-loss drug, Qsymia, which has just hit pharmacy shelves and has blockbuster potential given America's obesity problem. Of course, now the stock valuation is less compelling, leading some to look for greener pastures. Meanwhile, Qsymia sports some possible heart risks, and it remains to be seen whether patients and insurers will accept the drug's cost. Some even worry about the strength of its patent protection.

ARIAD Pharmaceuticals (Nasdaq: ARIA  ) , rose about 132% as its leukemia drug ponatinib is seen as likely to get FDA approval. Its cash burn has some worried, though, along with its dilutive rising share count. On the plus side, Ariad recently got cleared for an accelerated assessment of ponatinib by the European counterpart to the FDA, and it's seeking the same with the FDA, based on very promising phase 2 trial results. FDA approval is never certain, and the process is long, but Ariad has other treatments in its pipeline, addressing conditions such as prostate cancer, breast cancer, lung cancer, tumors, and more. ARIAD got more good news recently when the FDA said that approval for a companion diagnostic wasn't necessary for a ponatinib application.

Botox maker Allergan (NYSE: AGN  ) rose 9%, while investors worry about its shrinking market share and a stronger rival in the merged combination of Valeant Pharmaceuticals and Medicis Pharmaceutical. Still, the company has been posting rising revenue growth, and in a conference call, its management noted that, "Benefiting from our global footprint, our international sales in the first half grew double digits in many businesses namely: Ophthalmic pharmaceuticals, BOTOX, dermal fillers and breast aesthetics."

Other companies didn't do as well last year, but could see their fortunes change in the coming years. As of a few days ago, Questcor Pharmaceuticals  (Nasdaq: QCOR  ) shares had nearly doubled over the past year, thanks to solid sales of its multiple sclerosis drug Acthar. Indications were that its third quarter sales would be strong, as well, as August paid prescriptions for Acthar were up 34% over July levels. Several analysts upgraded their expectations for the company, too. But then, earlier this week, the stock's price got slashed on news that Aetna would only cover Acthar for very limited uses, not seeing it as effective enough for broader coverage. Questcor says the Aetna news won't have "a material impact" on the stock, but investors are clearly spooked.

The big picture
Demand for medications isn't going away anytime soon. A well-chosen ETF can grant you instant diversification across any industry or group of companies -- and make investing in and profiting from it that much easier.

The pharmaceutical industry is an ever-changing space. To help you keep up with it, one of The Motley Fool's top biotech analysts has created a new premium report on a high-flying pharmaceutical company -- Arena Pharmaceuticals. The report covers Arena's key opportunities and risks and comes with a full year of analyst updates. Click here to get your copy.

Longtime Fool contributor Selena Maranjian, whom you can follow on Twitter, holds no position in any company mentioned. Click here to see her holdings and a short bio. The Motley Fool has a disclosure policy.

We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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Selena Maranjian

Selena Maranjian has been writing for the Fool since 1996 and covers basic investing and personal finance topics. She also prepares the Fool's syndicated newspaper column and has written or co-written a number of Fool books. For more financial and non-financial fare (as well as silly things), follow her on Twitter...

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