Equity: Global Pharmaceuticals
Of the two choices for global pharmaceutical ETFs, neither provides a broad, neutral take on the segment. Both products take big leaps from the market portfolio in their selection and
“Both products take big leaps from the market portfolio” weighting procedures that make them tilted takes on the global market.
PPH is a descendent of the now-defunct HOLDRS ETFs, some of the earliest and simplest exchange- traded products. The current iteration of the fund is a traditional 1940 Act ETF, meaning unlike the old HOLDRS, it can reinvest dividends. The underlying index, however, remains highly concentrated. The fund holds the 25 largest pharmaceutical companies in the world, with a minimum market cap of $150M. PPH is market cap weighted, so its portfolio gives the biggest firms the biggest weights, making it representative of the top of the market, but it also omits over 200 of the smaller firms in the industry. Still, PPH's representative exposure coupled with its superior liquidity helps it earn our Analyst Pick for the segment.
The only other choice is the ETN issued by RBS, DRGS. The difference between the two products goes beyond structure, if only marginally. DRGS is even more concentrated, tracking an index of just 16 firms (all of which are also held by PPH). The main difference, however, is that unlike cap-weighted PPH, DRGS equal-weights each holding.
Put perhaps more cynically, for an additional 25 bps in expenses, DRGS gives you access to 9 fewer firms with a slightly more balanced weighting scheme. If that's appealing, a final note of caution: While PPH trades around $3M most days, DRGS is relatively illiquid. Unless a radical wave of investor interest boosts DRGS trading in the future, PPH is the clear choice here. (Insight updated 02/27/17)
ETF.com Efficiency Insight
PPH is the cheaper, more stable choice of the two funds in the segment. It has a larger asset base and more viability going forward. Its reasonable 35 bp expense ratio has come with solid
“PPH is the cheaper, more stable choice” tracking and tax management to date. Meanwhile, DRGS has a tiny asset base a fee that's 25 bps higher than PPH's. It's unlikely RBS will close DRGS before its termination date, so closure isn't a serious concern, but how much DRGS charges for access to just 16 highly liquid, multinational firms when a suitable proxy exists for nearly half the price puts it firmly in second place in a field of two. (Insight updated 02/27/17)
ETF.com Tradability Insight
PPH is the lone product in the segment that has any consistent trading. Around $3M changes hands most days. Institutional trading is also easy, with good block liquidity available at a
“PPH is the lone product in the segment that sees any consistent trading” reasonable creation cost. DRGS, on the other hand, is not an actively traded product. Not a single share of DRGS is exchanged on some days and spreads are astronomical. Use limit orders set close to indicative value to try and dampen costs, and be prepared to wait for your order to be filled. Larger trades will also prove expensive, with the best option being trading a full creation unit with the help of an AP. (Insight updated 02/27/17)
ETF.com Fit Insight
Both choices offer concentrated exposure to the top of the global pharmaceutical industry. PPH has 9 more holdings, making it slightly broader than DRGS, which tracks just 16 companies, but
“PPH ratchets its US exposure all the way up to 60%” neither choice will cover the 200+ smaller firms that make up the remainder of the market, and which many pharma investors may actually be looking for. PPH ratchets its US exposure all the way up to 60%. In fact, both products fail to capture the Asian firms in the industry, which make up 10% of the global pharmaceutical market. Both are therefore concentrated takes on the industry. DRGS is narrower in its holdings, but its equal weighting makes it slightly less top heavy than PPH. Since neither product will give you broad coverage, the fund with the larger holdings count (PPH) will get you closest to the market. (Insight updated 02/27/17)