PPH: a pharmaceutical ETF offering a total return close to 10%

DieterMeyrl/E+ via Getty Images

VanEck Vectors Pharma ETF (NASDAQ:PPH) is a healthcare exchange-traded fund (ETF) launched and managed by VanEck Associates Corporation. The fund only invests in 25 large cap pharmaceutical companies that are included in the MVIS US Listed Pharmaceutical 25 Index (MVPPHTR). This undiversified pharmaceutical ETF was created on February 1, 2000, over 21 years ago.

VanEck Vectors Pharmaceutical ETF is a small fund with net assets of $386 million, most of which (64 percent) is invested in stocks of companies based in the United States. This ETF has invested 3 percent or more in 20 companies, representing 92% of its total portfolio. This implies that most of its investments have a significant impact on the performance of this ETF.

VanEck Vectors Pharmaceutical ETF has invested more than five percent of its total portfolio into seven stocks – AstraZeneca PLC (ANZ), Eli Lilly and Company (LLY), AbbVie Inc. (ABBV), Novo Nordisk A/S (NVO), Bristol-Myers Squibb Company (BMY), Pfizer Inc. (PFE), Merck & Co., Inc. (MRK). Together, these seven stocks represent around 36% of his total investments.

Historically, VanEck Vectors Pharmaceutical ETF has generated a full return by about 10 percent. Over the last 21 years of its existence, its average annual return was 10.36%. Over the past 3, 5 and 10 years, this fund has generated an average annual return of 11.5%, 9.7% and 9.8%, respectively. The past year’s return was exceptionally good at 17.5%. Incidentally, the return of this fund has exceeded the return of its benchmark index throughout these years.

VanEck Vectors Pharmaceutical ETF has generated an average return of just under 2% over the past 10 years. Thus, price growth hovered around 8-10% during those years. Such price growth over a longer period is decent enough to attract growth-seeking investors. However, such a low yield will not suit income-seeking investors.

VanEck Associates Corporation has separate ETFs for the biotechnology and pharmaceutical sectors. A comparison of PPH with VanEck Biotech ETF (BBH) clearly reveals the growth pattern in these two major healthcare sectors. While BBH’s total return was negative 7.5% over the past year, its total return to return to over the past three and five years has been 8.4% and 6.8%, respectively. However, in the long run, BBH’s comeback beat PPH’s. BBH has achieved an average annual total return of over 14% over the past 10 years.

Considering the fact that pharmaceutical stocks have performed poorly after the pandemic period, the growth rate of PPH in the short to medium term is much higher than I expected. A closer look at PPH’s top 20 holdings (which make up 92% of its portfolio) reveals that half of those stocks have performed extremely well.

In addition to the top seven holdings (more than 5% of total investments) mentioned above, McKesson Corporation (MCK), AmerisourceBergen Corporation (ABC) and Zoetis Inc. (ZTS) have matched or exceeded PPH’s performance over the past the last year. and five years. Together, these stocks represent half of this ETF’s investments and have generated average price growth of 46% and 143% over the past year and five years, respectively. Unfortunately, the remaining 50% of this pharmaceutical ETF has not been as productive.

Companies included in PPH’s investment portfolio have generated strong earnings growth from 26.5 %, P/E of 10.7, Price/Book of 2.7 and Price/cash Flow of 9.5, which suggests that this ETF is undervalued. Price multiples are significantly lower than its peers and index despite such strong earnings and historical stable price growth.

A likely reason for such an undervaluation could be the weak average sales (6%) and cash flow growth (5.1%) of these big pharma companies. Another demotivating factor could be the proposed prescription drug deal. This agreement favored by the Democrats and also accepted by the Republicans, if implemented, will have a negative impact in the short term.

The prescription drug agreement, which is a $1.85 social safety net plan, will allow the US government to negotiate drug prices covered by Medicare, the federal health insurance program for people age 65 or older and for people with disabilities. “From 2023, negotiations could begin on the most expensive drugs – treatments for cancer and rheumatoid arthritis, as well as blood thinners. Most drugs would still be granted patent exclusivity for nine years before negotiations cannot begin, and more complex drugs, called biologics, would be protected for 12 years.”

The pharmaceutical ETF VanEck Vectors is already trading very close to its 52-week high of $84.27, which was recorded on Friday, April 8, 2022. The price is currently in a downtrend, and it could fall further in the next days. But this could be a very short-term phenomenon. The short-term simple moving averages (SMA) are placed significantly higher than the long-term SMAs, implying that the stock should rise even in the short term. As on April 13, 2022, the 200-day SMA (75.39), the 100-day SMA (76.3), the 100-day SMA (77.6) and the 10-day SMA (81.43) are exactly in sync, which may indicate the start of a steady bull run.

The pharmaceutical sector, in general, performed poorly in 2018 (due to rising tariffs, interest rate hikes and tax cuts) and 2020 (due to the Covid-19 pandemic) . Despite this, PPH has been able to generate nearly double-digit total returns over the past five years. The sector has shown strong signs of post-pandemic recovery. In general, the pharmaceutical sector is on the verge of strong growth in the medium and long term.

As the world cannot do without pharmaceuticals – whether essential and life-saving medicines, general medicines or preventive medicines, pharmaceutical companies will always be on a growth trajectory. Large-cap companies in PPH’s portfolio will benefit immensely.

The Prescription Drug Agreement Act poses a threat to big pharma. However, the pharmaceutical industry is getting used to these things; there’s an industry-wide problem here every four or five years. The big pharmaceutical companies thus experience years of weak growth between regular returns. Therefore, it will be wise to stay invested in this ETF for longer. I believe this superbly boring ETF is a great choice for risk averse investors.