A "Dynamic" Play

02/03/2006 12:00 am EST

Focus:

Doug Fabian

Editor, Successful ETF Investing, ETF Trader's Edge, Weekly ETF Report, and ETFU.com

It should come as no surprise that Doug Fabian –a long-standing expert on mutual funds–has also become one of the industry leading experts on ETFs, and–as seen in his top pick for 2006–an even newer vehicle developing in the ETF market.

"My pick for 2006 is neither individual stock nor traditional mutual fund. In fact, it’s not even a traditional exchange traded fund. It’s the PowerShares Dynamic Pharmaceuticals (PJP ASE). PowerShares combine the best features of ETFs—low expense ratios, ease of trade, and transparency of holdings—with the active management and research associated with traditional mutual funds.

"PJP tries to capture the performance of Dynamic Pharmaceutical Intellidex, a custom index designed to identify the best stocks within the pharmaceutical industry. PowerShares achieves that by employing its own proprietary stock selection methodology. This contrasts with traditional ETFs, which are simply constructed to mirror an existing sector index. Although PJP is very young (introduced to the market midway through 2005), its holdings read like a who’s who of the drug industry.

"What you get when you buy PJP is the best of the best in the pharmaceutical world: Abbott Labs, Amgen, Bristol-Myers, Genentech, J&J, and Wyeth. And of course, no pharma portfolio would be complete without Merck and Pfizer. The beauty of PJP is you get well-rounded exposure to a variety of pharmaceuticals, biotech, specialized drug makers, and mass-market drug makers. I
f you believe, as I do, in the ‘demographic story,’ you believe that an aging population will continue to consume drugs at record rates. And, despite regulatory and legal obstacles, consumer demand will likely continue fueling record drug company profits.

"I like PJP as a low- to moderate-risk equity opportunity, and I think it’s a great long-term play for steady price appreciation through 2006. However, that doesn’t mean I think you should just buy and hold the fund. I would take no more than a 10% drawdown on this position after I bought it. So, whatever your purchase price, if you lose more than 10%, or if the fund drops more than 10% from its high after you purchase it, protect your downside risk with a firm stop loss."

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