Make Money in Strong Pharma Stocks the Easy Way

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Exchange-traded funds offer a convenient way to invest in sectors or niches that interest you. If you expect the pharmaceutical industry to thrive as our global population grows and ages, the iShares Dow Jones US Pharmaceuticals ETF (NYS: IHE) 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 pharma ETF's expense ratio -- its annual fee -- is a relatively low 0.47%.

This ETF has performed well, but it's also fairly young, with just about five years on the books. It trounced the S&P 500 (INDEX: ^GSPC) over the past one, three, and five years, on average. 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 25%, this fund isn't frantically and frequently rejiggering its holdings, as many funds do.

What's in it?
Several of this ETF's components made strong contributions to its performance over the past year. Ariad Pharmaceuticals (NAS: ARIA) , for example, surged some 160%. Some think it's gotten ahead of itself, though, as it's not yet profitable, and while its partnership with Merck (NYS: MRK) may offer benefits for its cancer drugs in development, the alliance will also eat up some eventual profits. Meanwhile, Pharmasset (NAS: VRUS) gained even more, nearly quintupling in value, while also reporting net losses and lacking any approved, marketable drugs yet.

Perrigo (NAS: PRGO) , maker of over-the-counter drugs and generics, advanced 55%, but a rash of insider selling has some worried. That's not necessarily a bad sign, at least in moderation, as many executives are compensated largely in stock and have to sell some from time to time in order to generate cash. But large numbers of sales can be a red flag.

Other companies didn't add as much to the ETF's returns last year, but could have an effect in the years to come. Abbott Labs (NYS: ABT) , for instance, gained only 3%, but it actually has plenty of profitable drugs on the market, and sports a double-digit revenue growth rate, solid profit margins, and an attractive dividend.

The big picture
Demand for medications 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.

Learn aboutthe best dividend ETFs. And if you're looking for some great investments beyond ETFs, consider these10 stocks for your retirement portfolio.

At the time this article was published Longtime Fool contributorSelena Maranjianholds no position in any company mentioned.Click hereto see her holdings and a short bio. The Motley Fool owns shares of Abbott Laboratories.Motley Fool newsletter serviceshave recommended buying shares of Abbott Laboratories. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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