With Two Companies Dictating Everything, IHE Is Riskier Than Most Investors Realize

Half of every dollar invested in iShares U.S. Pharmaceuticals ETF (NYSEARCA:IHE) rides on just two companies pulling in opposite directions in 2026. With a 0.38% expense ratio, nearly $1.1 billion in net assets, and a 20-year track record dating to May 2006, it offers income-oriented and sector investors a focused vehicle for pharmaceutical exposure. Focused exposure means the fund’s performance depends heavily on a small number of companies navigating serious headwinds.

When Two Stocks Are Nearly Half Your Fund

The ETF holds 50 positions, but the top two dominate in a way that makes the rest almost incidental. Johnson & Johnson (NYSE:JNJ | JNJ Price Prediction) carries a 25.4% weight, and Eli Lilly and Company (NYSE:LLY) sits at 21.4%. Together they account for roughly 46.8% of the entire fund. The next six largest holdings each represent between 4% and 5% of the portfolio. For nearly half the capital invested, the fund’s performance is largely determined by two companies.

The two giants are pulling in opposite directions in 2026, and neither is immune to the regulatory environment bearing down on the industry.

Johnson & Johnson has held up well relative to the broader fund. Shares are up roughly 14% year-to-date, driven by strong pharmaceutical growth. DARZALEX generated $3.90 billion in the most recent quarter, up 26.6% year-over-year, and TREMFYA posted $1.59 billion, up 67.6%. But JNJ faces real headwinds: STELARA biosimilar erosion cut that drug’s revenue by 47.7% in Q4 2025, and the company is navigating $854 million in litigation charges in the same quarter. A planned separation of its Orthopaedics segment adds further complexity.

Eli Lilly is the more volatile story. GLP-1 drugs Mounjaro and Zepbound have driven most of Lilly’s revenue growth, with Mounjaro posting $7.41 billion in Q4 2025 revenue, up 110% and Zepbound delivering $4.26 billion, up 123%. But the stock has fallen roughly 15% year-to-date and is down nearly 10% over the past month. Lower realized prices offsetting volume gains, manufacturing capacity constraints, and compounding competition have all pressured the stock. Because Lilly’s revenue is overwhelmingly concentrated in two drugs, any disruption to the GLP-1 market flows directly into IHE’s second-largest holding.

The Policy Pressure Building Across the Whole Portfolio

The entire ETF faces a policy risk specific to 2026. The Trump administration has been aggressively pursuing drug pricing reform through executive orders, voluntary Most Favored Nation agreements, and proposed CMS rules. By the end of 2025, 16 drug manufacturers had signed voluntary MFN pricing agreements. In late December 2025, CMS proposed the GLOBE and GUARD models, which would incorporate international price benchmarks into Medicare drug rebate calculations for Part B and Part D drugs respectively.

HHS Secretary Robert F. Kennedy Jr.’s MAHA agenda has introduced regulatory unpredictability that is harder to quantify but real in its effect on investor sentiment. Kennedy has signaled scrutiny of drug approvals, marketing practices, and the GLP-1 category specifically, which directly threatens Lilly’s core franchise. A Polymarket prediction market currently prices a 37.5% probability of the U.S. federal government taking a stake in Eli Lilly, a reflection of how aggressively traders are pricing in government intervention risk for the sector’s largest growth story.

The ETF is essentially flat year-to-date, down about 0.5%, which masks the tug-of-war between JNJ’s gains and LLY’s losses. If the pricing policy environment hardens, the drag on the fund’s largest holding could outweigh JNJ’s defensive contribution.

Two Data Points That Will Drive IHE’s Performance in 2026

Two data points will determine how IHE performs from here:

1. CMS rulemaking on GLOBE and GUARD: These proposed rules would apply international pricing benchmarks to Medicare Part B and Part D drugs. If finalized as proposed, they represent a structural reduction in pricing power for the fund’s holdings. A finalized GLOBE or GUARD rule would materially change the revenue assumptions for nearly every major holding in this ETF. CMS publishes rulemaking updates on its website, typically around its standard announcement windows.
2. Eli Lilly’s realized pricing data: Each quarterly earnings release includes realized net price versus volume. If volume growth continues but net pricing keeps declining, the revenue trajectory that justifies LLY’s valuation at a trailing P/E of roughly 40x becomes harder to defend. A second consecutive quarter of price erosion accelerating beyond volume gains would be a meaningful warning sign for the fund’s second-largest position.

IHE is an efficiently constructed fund. Its 0.24 portfolio turnover and low cost make it efficient. But any investor holding it today should understand that nearly half their exposure lives in two companies navigating very different challenges, both facing a policy backdrop that has rarely been this active. The fund’s near-term performance will be determined less by the other 48 holdings and more by what happens to LLY’s pricing story and how aggressively Washington pursues drug cost reform in 2026.