Even If Eli Lilly Stock Continues to Shine, Stay Away from This Pharmaceutical ETF

One of the biggest misconceptions about ETFs is that they are highly diversified “baskets” of stocks. Sometimes they are. But as the iShares US Pharmaceuticals ETF (IHE) indicates, even with 60 stock holdings and $1 billion in assets, large ETFs can still be more of a duopoly than a democracy.

With 44% allocated to just two stocks, and 60% allocated across the top six names, the rest are essentially along for the ride. With that important note established, let’s look at the potential up-move IHE is hinting at.

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We have to separate whether the strong-looking chart pattern reflects the pair at the top, or a more wholesale rally brewing in pharma stocks.

The chart looks to be on the verge of breaking to new highs, in a way that could lead to a new price trading range. However, this market, now flooded with technicians, is going to test that first. After all, this industry does not get the same “hall pass” that big tech does.

But if you are planning to buy IHE to capture a broad rising tide across the pharmaceutical industry, you need to freeze. Look under the hood of this vehicle, because IHE features an extreme structural configuration that makes it wildly different from other major drug ETFs. This is not an industry-wide breakout — it is an absolute illusion of sector strength masked by a tiny, hyper-concentrated handful of stocks.