Behold an Outperforming Basket of Pharma Stocks

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Exchange-traded funds offer a convenient way to invest in sectors or niches that interest you. If you'd like to add some pharmaceutical stocks to your portfolio, the PowerShares Dynamic Pharmaceuticals ETF (NYSE: PJP  ) 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 PowerShares ETF's expense ratio -- its annual fee -- is 0.63 %. The fund is on the small side, too, so if you're thinking of buying, beware of possibly large spreads between its bid and ask prices. Consider using a limit order if you want to buy in.

This ETF has performed  well, trouncing the world market 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 23 %, this fund isn't frantically and frequently rejiggering its holdings, as many funds do.

Why pharmaceuticals?
A simple answer: demographics. As our global population grows and ages, and lives longer, the demand for health-care products and services seems quite likely to grow. In addition, as developing nations develop, their populations will have more money to spend on health care.

More than a handful of pharmaceutical companies  had strong performances over the past year. Gilead Sciences (Nasdaq: GILD  ) , for example, surged 80% and is near a 52-week high. Known for its HIV treatments, it has been expanding its scope, most notably into Hepatitis treatments. A Hep C treatment lately yielded strong results in clinical testing, boosting the stock, and results so far for HIV treatments are also encouraging. The company recently announced plans to buy cancer specialist YM Biosciences (NYSEMKT: YMI  ) , which is developing a treatment for myelofibrosis. Some worry about the value of its DNA-related patents as the Supreme Court may rule that genes can't be patented.

Celgene (Nasdaq: CELG  ) gained 16%. Its stock took a hit  back in June when it withdrew its approval application in Europe for its multiple myeloma drug, Revlimid. But it gained on good results for its pancreatic drug, Abraxane. Some see Celgene as an attractive acquisition  target due to its pipeline, while others are just happy to see it growing briskly, with my colleague David Williamson referring to it as a "cash flow monster." In the meantime, it's making some promising deals and waiting for some FDA decisions.

Irish women's health pharmaceutical company Warner Chilcott (Nasdaq: WCRX  ) is up 7% over the past year, and offers a dividend yield above 4%. Its primary drug, Actonel, has been weakening, though another one may take its place. But competition looms, some see its dividend as threatened, and others see its moat weakening and the stock offering insufficient long-term value. While many doubt the company, its third-quarter earnings more than tripled. 

Other companies didn't do as well last year, but could see their fortunes change in the coming years. Spectrum Pharmaceuticals (Nasdaq: SPPI  ) , for example, sank 23%. The company has reported solid results for its colorectal cancer drug, Fusilev -- but that success is partly due to a supply shortage faced by generic competition. Spectrum recently announced a special dividend, and some see it sporting an attractive valuation, despite concerns. Many doubt it, though, and it has high short interest.

The big picture
Demand for drugs 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.

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