4 Top-Ranked Health Care ETFs for a Healthy Portfolio - ETF News And Commentary

After an incredible 2014, the health care sector is crushing the overall market this year too. This is largely owing to the bullish trend in both the pharma and biotech segments from strong earnings growth, a merger and acquisition frenzy and encouraging industry trends.

Earnings Growth

The health care sector was the second contributor to earnings growth in Q4 trailing autos and the largest contributor to revenue growth. It is expected to deliver earnings growth of 11.8% and revenue growth of 9.1% in Q1, as per the Zacks Industry Trend. While the results will be hurt by negative currency translations, new products will likely contribute to the results (read: Big Pharma Weak Guidance Put These ETFs in Focus).

Mergers & Acquisitions

Recent mergers and acquisition activities at big giants like AbbVie (ABBV), Pfizer (PFE), Shire (SHPG) and Salix Pharmaceuticals (SLXP) have given a big boost to both pharma and biotech stocks this year. AbbVie is set to acquire Pharmacyclics (PCYC) for nearly $21 billion in one of the biggest deals of recent times while Pfizer (PFE) will buy Hospira (HSP) for $17 billion.

Meanwhile, Shire acquired rare-disease treatment developer NPS Pharmaceuticals for $5.2 billion and Salix will be taken over by VValeant Pharmaceuticals (VRX) after Endo International (ENDP) withdrew its proposal. With this, the mergers and acquisitions targeting both biotech and pharma reached $59.3 billion this year, up 94% year over year (read: Pharma ETFs to Soar No Matter Who Wins Salix).

Other Factors

Another bullish trend seen in the health care space is expansion into emerging markets. Several companies whether big or small are looking to expand their presence in India, China, Brazil and other developing markets. Moreover, companies like Merck (MRK), Amgen, Biogen (BIIB), and Actavis (ACT) are eyeing deals for the development of the highly lucrative biosimilars, the generic versions of biologics.

Further, the industry is clearly benefiting from promising drug launches, cost-cutting efforts, an aging population, expanding insurance coverage, growing middle class, insatiable demand for new drugs, ever-increasing health care spending, and the Affordable Care Act or Obamacare. A larger number of insured Americans would be able to afford medicines under Obamacare. This would drive up revenues of biotechnology companies and lead to more profits.

Added to the strength is its non-cyclical nature, which provides a defensive tilt to the portfolio. Amid the global growth worries, strong dollar, and geopolitical tensions, the move to defensive stocks could make for a compelling choice for investors. Moreover, the health care sector has a solid Zacks Rank at the time of writing – about 62% of the industries under health care have Zacks Rank in the top 42%, spreading optimism in the sector (see: all the Health care ETFs here).

Given these promising trends, investors should look at some of the top-ranked ETFs that target the broad health care segment and are expected to outperform in the months to come. These funds have enjoyed a strong momentum in the year-to-date period and have potentially superior weighting methodologies, which could allow these to continue leading the health care space going forward.

iShares U.S. Healthcare Providers ETF (IHF)

This ETF follows the Dow Jones U.S. Select Healthcare Providers Index with exposure to companies that provide health insurance, diagnostics and specialized treatment. In total, the fund holds 49 securities in its basket with the largest allocation going to United Health (UNH) and Express Scripts (ESRX) at 13.8% and 9.1%, respectively. Other firms do not hold more than 7.05% of IHF.

The fund has been able to manage $799.3 million in its asset base while volume is moderate at about 68,000 shares per day on average. It charges 43 bps in annual fees and expenses and has added 14.2% so far this year. The fund has a Zacks ETF Rank of 1 or ‘Strong Buy’ rating with a Medium risk outlook (read: Top Ranked Healthcare Service ETF in Focus: IHF).

Guggenheim S&P 500 Equal Weight Health Care ETF (RYH)

This fund provides equal weight exposure of around 2% to 55 stocks and tracks the S&P 500 Equal Weight Index Health Care. HCA Holdings (HCA), Regeneron Pharmaceuticals (REGN) and Biogen occupy the top three positions in the basket. Health care providers and services takes the top spot at roughly 31.2% of the total, closely followed by pharmaceuticals (23.4%) and health care equipment and supplies (23.3%).

The product has accumulated $666.5 million in its asset base while it trades in moderate volume of around 51,000 shares. The expense ratio came in at 0.40%. The fund has added 10.1% so far this year and has a Zacks ETF Rank of 2 or ‘Buy’ rating with a Medium risk outlook.

SPDR S&P Health Care Services ETF (XHS)

This product also uses the equal weight methodology by tracking the S&P Health Care Services Select Industry Index. Holding 56 stocks in its basket, each security accounts for less than 2.4% of total assets. Select Medical (SEM), ExamWorks Group (EXAM) and Kindred Healthcare (KND) are the top three holdings (read: Top-Ranked ETFs from Top-Performing Sectors).

From an industry look, health care services accounts for one-third of the portfolio while health care facilities, managed and health care distributors take the remainder. This is often an overlooked fund with AUM of $183.4 million and average daily volume of less than 33,000 shares. The product charges 35 bps in annual fees and has gained 12.2% in the year-to-date timeframe. It has a Zacks ETF Rank of 2 with a Medium risk outlook.

PowerShares Dynamic Healthcare Sector Portfolio (PTH)

This fund follows the DWA Healthcare Technical Leaders Index and holds a basket of 49 U.S. companies. The product has amassed $183.5 million in its asset base and charges 60 bps in fees and expenses from investors. Volume is light, exchanging less than 31,000 shares in hand on average. The ETF is pretty well spread out across components with Medivation (MDVN), Regeneron Pharmaceuticals and Actavis making up for top three firms with a combined 14.9% share. Other firms hold less than 4% share each.

In terms of industrial exposure, about half of the portfolio is allotted to biotechnology while health care providers and services and health care equipment and supplies round off to the top three spots. PTH has returned 15.2% in the year-to-date time frame and has a Zacks ETF Rank of 2 with a High risk outlook.

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ISHARS-US H C P (IHF): ETF Research Reports
 
GUGG-SP5 EW HEA (RYH): ETF Research Reports
 
SPDR-SP HLTH CR (XHS): ETF Research Reports
 
PWRSH-DW HLT MO (PTH): ETF Research Reports
 
ABBVIE INC (ABBV): Free Stock Analysis Report
 
PFIZER INC (PFE): Free Stock Analysis Report
 
VALEANT PHARMA (VRX): Free Stock Analysis Report
 
SALIX PHARM-LTD (SLXP): Free Stock Analysis Report
 
SHIRE PLC-ADR (SHPG): Free Stock Analysis Report
 
MERCK & CO INC (MRK): Free Stock Analysis Report
 
BIOGEN IDEC INC (BIIB): Free Stock Analysis Report
 
ACTAVIS PLC (ACT): Free Stock Analysis Report
 
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