Pfizer Failure: An Important ETF Lesson
By now, I know many of you have heard about the meltdown in the shares of drug-giant Pfizer (PFE). The company’s stock price sank about 11% Monday, after news broke last weekend that Pfizer had cancelled clinical trials of what was supposed to be its next big thing: the heart-disease combating drug torcetrapib.
The failure of Pfizer’s latest clinical trial illustrates what’s known as "business risk." When investing in individual companies, you are subject to the business risk associated with that company’s situation. And while the benefits of owning a big, fast-moving stock can be quite appealing, the downside can be really, really ugly.
Let’s take a look at a six-month chart of Pfizer shares.
If you bought the shares in August, after the stock had broken above its 50- and 200-day moving average, you likely are holding onto a loser today. You were a star for a few months; now you’re a has-been. That kind of stock price downturn hurts. Such results often scare people away from the market entirely.
Fortunately, there is a safer way to play the pharmaceutical-sector game without subjecting yourself to an individual company’s business risk. Let’s take a look at a six-month chart of the Pharmaceutical HOLDRs (PPH), an ETF that includes the top companies in the pharmaceutical industry.
As you can see, if you would have purchased PPH in August you would be sitting on a gain right now. Sure, you wouldn’t have had seen quite the spike in price you saw in PFE shares, but you wouldn’t be in the red right now taking it on the chin and wondering where you went wrong either.
Herein lies a great lesson for investors. By using ETFs, you can minimize the business risk associated with individual companies. At the same time, you can participate in that sector’s price movement.
Of course, things won’t always work out this way. Sometimes an individual company’s returns will far outpace the sector’s ETF. That said, for consistent safety as well as solid upside, no investment tool can beat ETFs.
Remember today’s Pfizer lesson the next time you are tempted to buy a particular stock instead of that stock’s sector ETF.
Jim Woods is a 30-plus-year veteran of the markets with varied experience as a broker, hedge fund trader, financial writer, author and newsletter editor.
His books include co-authoring, “Billion Dollar Green: Profit from the Eco Revolution,” and “The Wealth Shield: How to Invest and Protect Your Money from Another Stock Market Crash, Financial Crisis or Global Economic Collapse.” He’s also ghostwritten many books and articles, as well as edited content for some of the investment industry’s biggest luminaries. Read more about Jim Woods.
