There's no denying pharmaceutical stocks can be great investments. On the flip side, there's also no denying that picking the right drugmakers is a tricky business. All of them are constantly fighting the patent expiration clock, just as each of them is perpetually facing stiff competition.
Yet, most investors still recognize the importance of exposure to this sliver of the healthcare sector.
There is a solution. While not necessarily the case for all industries, the pharma industry is one that's often best bought as a basket rather than in the form of only one or two pharmaceutical stock picks. And one basket in particular stands out among the rest.
This twist on an old idea drives superior results
Plenty of investors have done well by owning individual pharma stocks. A bunch of other investors haven't done quite as well, however, unable to keep close tabs on every drug in a pharma company's portfolio and research and development pipeline. That's why investing in a pharmaceutical exchange-traded fund is the most viable option for most people. The iShares U.S. Pharmaceuticals ETF and SPDR S&P Pharmaceuticals ETF are popular choices.
The Invesco Dynamic Pharmaceuticals ETF (PJP -0.92%) is a top pharma fund choice, too. Unlike the aforementioned iShares and SPDR funds, the Invesco Dynamic Pharmaceuticals ETF isn't built to mirror a highly inclusive pharma index. Rather, the Invesco fund typically mirrors the Dynamic Pharmaceutical Intellidex index, which holds around 30 pharma stocks hand-picked based on a variety of fundamental factors including earnings growth rates, valuation, and quality. This rules-based approach means familiar names such as Eli Lilly, Merck, and Abbott Laboratories are the fund's current top three holdings.
The ETF's methodology might seem antithetical to index investing (or indexing), which many use to remove the risks of picking individual stocks. However, the criteria for being included in the ETF and its underlying index are fundamentally based, leaving no room for the emotionally driven investing decisions that snare so many of those who invest in individual stocks.
More important, the ETF's returns support its approach to selecting stocks. While it's just been a so-so performer of late -- as has been the case with most drug stocks -- the Invesco Dynamic Pharmaceuticals ETF boasts an industry-beating and a market-beating long-term performance.
IHE Total Return Level data by YCharts
Past performance is no guarantee of future results, of course. But, that's a proverbial two-way street. It's very possible the pharmaceutical industry's stocks could perk up soon and start outpacing the broad market again.
This is the crux of the reason you diversify your portfolio.
Make the most out of your limited time
Don't sweat it if you instead own the SPDR S&P Pharmaceuticals ETF or the iShares U.S. Pharmaceuticals ETF. Those are solid funds, too. In the same vein, if you're comfortable with buying and then keeping tabs on individual drug stocks, go for it.
For most casual investors looking for simpler solutions, however, owning individual pharmaceutical stocks requires a little more due diligence and a little more ongoing maintenance than most have time to give.
See, investments in pharma companies these days are often just investments in a small handful of specific prescription drugs, if not just one single drug candidate. That means you need to understand a specific drug's potential for approval, follow its patent expiration timeline, and remain aware of prospective competing drugs, just to name a few common tasks. It takes a lot of effort.
The Invesco Dynamic Pharmaceuticals ETF doesn't directly do all this work for you. But its criteria-based selection approach indirectly handles the tasks by virtue of weighing and constantly reweighing the underlying fundamentals reflective of an individual drug company's prospects.
Bottom line? This ETF is a solid one-stop solution if you're looking for exposure to the pharmaceutical market. Use your limited time and stock picking skill to find names from other sectors and industries, where such an effort will do you a great deal more good.