Make Money in Strong Pharmaceutical 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 population grows, ages, and develops medical conditions, the PowerShares Dynamic Pharmaceuticals ETF (NYS: PJP) 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 PowerShares ETF's expense ratio -- its annual fee -- is a relatively low 0.63%, a bit higher than many ETFs but still far lower than most stock mutual funds.

This ETF has performed very well, beating the S&P 500 handily over the past five years. 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 9%, 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. Spectrum Pharmaceuticals  (NAS: SPPI) has more than doubled in 2011, in large part due to its Fusilev drug, which combats the side effects of chemotherapy. In addition, its non-Hodgkin's lymphoma treatment, Zevalin, has just become more convenient to use, which may attract more prescriptions. Spectrum CEO Raj Shrotriya was recently named a top biotech CEO by TheStreet.com. Vertex Pharmaceuticals' (NAS: VRTX) Matt Emmens is ranked No. 1.

Vivus Pharmaceuticals (NAS: VVUS) gained about 8%. Fears that its anti-obesity medication might cause birth defects has resulted in its asking for FDA approval only for men and women of non-child-bearing ages for now, while further research is conducted. But early results are promising for the drug. Abbott Labs  (NYS: ABT) , up 18%, sports strong fundamentals, but plans to split in two soon. Its new pharmaceuticals-only entity will be depending on anti-inflammatory-disease drug Humira for a significant portion of its earnings, which is a bit risky, as it faces competition from fellow ETF holding Pfizer and others. 

Other companies didn't add as much to the ETF's returns last year, but could have an effect in the years to come. Amgen gained just 4% over the past 12 months, and while some expect the stock's value to rise due to a share buyback, others would rather see the company invest that money in promising acquisitions, targeting a company such as Keryx Biopharmaceuticals (NAS: KERX) , which is developing treatments for cancer and renal diseases, among others, partly in partnership with Aeterna Zentaris (NAS: AEZS) . Some are not thrilled with management, too, as the company's CEO got a huge raise last year, while the company didn't grow and it laid off thousands of workers.

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 LongtimeFool contributorSelena Maranjianowns shares of Amgen, but she holds no other position in any company mentioned.Click hereto see her holdings and a short bio. The Motley Fool owns shares of Abbott Labs.Motley Fool newsletter serviceshave recommended buying shares of Abbott Labs, Vertex Pharmaceuticals, and Pfizer. 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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