ETF Reading List – January 5, 2009 | Main | Advancing ETFs: Advance/Decline Data Shed Some Light

Pharma ETF: Providing Stability in an Unstable Investment World (XPH)

05 January 2009 at 2:59 pm by Gary Gordon     Bookmark and Share    Follow EtfExpert on Twitter

By now, most people know that a few currencies like the yen and the U.S. dollar actually earned money in 2008. Other than that, you may have seen a positive return from your CDs or U.S. treasury bonds… because there was not much else!

Each broad market stock indicator, and every stock sector ETF, posted double digit losses. The best may have lost 16% like SPDR Select Staples (XLP), while the worst gave up an excess of 50% like the SPDR Select Financials (XLF).

Yet the best performing stock-based ETF for 2008 was a sub-segment of the health-care arena, SPDR Pharmaceuticals (XPH). It only lost 6%. And unlike other investments that found themselves journeying all over the map with extreme volatility, XPH was the very essence of calm.

SPDR Select Pharmaceuticals (XPH) in 2008
% Gain/Loss
5 days 6.5%
1 Month 10.1%
3 Months 1.2%
6 Months 1.3%
1 Year -6.1%

The numbers themselves show the tranquility during what may have been the most trying 3 months ever. Not only did the overall markets shatter volatility records circa the CBOE Volatility Index (VIX), but intra-day price movement had never seen an October/November with wider percentage swings. Yet SPDR Pharmaceuticals (XPH) was not much "worse for the wear."

If you are a traditionalist, you may want to ascertain an ETFs "beta," to see if its price movement is typically greater or less than the market at large. Turns out that SPDR Pharmaceuticals (XPH) is 3/5 as active (a.k.a. volatile) as the S&P 500.

So okay… we've found a low-beta ETF that didn't get cremated in the Great Asset Wipeout of 2008. Why would this necessarily translate into worthwhile gains going forward?

For one thing, the pharmaceutical giants are either cash-rich or time-tested or both. Johnson and Johnson (JNJ), a triple A-rated corporation for 60 years, hasn't traded at a valuation this low in 3 decades. Pfizer (PFE) has a single-digit P/E, endless cash-on-hand, a 7%+ dividend yield and scores of drugs near the distribution phase. Merck (MRK) has a 5-star rating from the folks at Morningstar, which also rates SPDR Pharmaceuticals (XPH) at a Fair Value that is 27% higher than the current price.

Look… in the current environment, there are no easy answers. And Pharma (XPH) isn't likely to bowl you over with bust-a-move enthusiasm.

Nevertheless, from just about every angle, XPH is a combination of safety and sensibility. It is also one of only 2 stock ETFs (in a cast of many 100s) that recently broke above a long-term, 200-day moving average. For many, that signals the start of a long-term uptrend.

Xph pharma etf

Disclosure Statement: ETF Expert is a web log ("blog") that makes the world of ETFs easier to understand. Pacific Park Financial, Inc., a Registered Investment Advisor with the SEC, may hold positions in the ETFs, mutual funds and/or index funds mentioned above. Investors who are interested in money management services may visit the Pacific Park Financial, Inc. web site.

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