In financial markets, things can change in a heartbeat. And while it may not have happened in a heartbeat this time, the healthcare sector is one of the worst-performing groups in the S&P 500 this year while being the leading sector in the benchmark U.S. equity gauge in 2018.
That does not mean healthcare stocks and exchange-traded funds (ETFs) have been delivering dismal showings. The Health Care Select Sector SPDR (NYSEARCA:XLV), the largest healthcare ETF by assets, is up 11.8% year-to-date compared to 11.4% for the S&P 500.
While traditional healthcare ETFs are not delivering jaw-dropping performances in the first quarter, there are some encouraging signs from more focused healthcare ETFs, including biotechnology funds, among others.
For investors, the good news is there are plenty of cost-effective options among traditional healthcare ETFs with rebound potential as 2019 moves forward. Additionally, there are plenty of compelling avenues for investors looking for thematic, fast-growing growing exposure within the normally defensive sector.
iShares U.S. Medical Devices ETF (IHI)
Expense Ratio: 0.43% per year, or $43 on a $10,000 investment.
Up nearly 16% year-to-date, the iShares U.S. Medical Devices ETF (NYSEARCA:IHI) is extending a run of out-performance of traditional healthcare ETFs. The largest ETF dedicated to medical device makers beat the S&P 500 in five of the six years spanning 2013 through 2018, and IHI topped the S&P 500 Health Care Index in four of those six years.
Stock strategist Matt Maley said in a CNBC interview “that his top picks in the sector are Boston Scientific, Danaher and Abbott Laboratories. Danaher and Abbott’s stocks both hit 52-week highs on (last) Friday.”
IHI hit an all-time high on the first two trading days of March, an impressive feat when considering broader healthcare ETFs often lag in the third month of the year.
KraneShares MSCI All China Health Care Index ETF (KURE)
Expense Ratio: 0.82%
Investors should not exclusively focus on domestic healthcare ETFs, not when the sector has compelling growth opportunities in other major markets, such as China. The KraneShares MSCI All China Health Care Index ETF (NYSEARCA:KURE) is one fund to use to tap China’s fast-growing healthcare sector.
KURE, which follows the MSCI China All Shares Health Care 10/40 Index, is just over a year old. Importantly, this healthcare ETF is starting to perk up. After surging nearly 16% in February, KURE is higher by more than 25% this year, and the fundamentals back that ascent.
“China is the second largest healthcare market globally with total healthcare expenditure reaching $558 billion in 2016, a number projected to reach $1.1 trillion by 2020,” according to KraneShares. “There is still opportunity for considerable growth in China’s healthcare market with per capita health spending at just $398, compared to an average of over $6,500 for the world’s top eight healthcare markets in terms of per capita expenditure.”
Invesco DWA Healthcare Momentum ETF (PTH)
Expense Ratio: 0.6%
Some sector funds are rooted in momentum strategies, and the Invesco DWA Healthcare Momentum ETF(NASDAQ:PTH) is an example of healthcare ETF that relies on the momentum factor. PTH tracks the Dorsey Wright Healthcare Technical Leaders Index.
That “index is designed to identify companies that are showing relative strength (momentum), and is composed of at least 30 securities from the NASDAQ US Benchmark Index,” according to Invesco.
Regardless of sector, the momentum factor is heavily rooted in the idea that stocks that have already appreciated significantly can continue doing so. Hence, it is not surprising that PTH allocates about 35% of its weight to healthcare equipment and medical device companies. Fueling this healthcare ETF’s momentum is a considerable allocation to smaller stock as large caps represent just 37% of PTH’s roster.
VanEck Vectors Generic Drugs ETF (GNRX)
Expense Ratio: 0.55%
Often overlooked among healthcare ETFs, the VanEck Vectors Generic Drugs ETF (NASDAQ:GNRX) is just over three years old and was the first ETF dedicated to makers of generic pharmaceuticals. The $3.3 million GNRX follows the Indxx Global Generics & New Pharma Index.
That benchmark “is intended to track the overall performance of companies that derive a significant proportion of their revenues or that have the potential to derive a significant proportion of their revenues from the generic drug industry, or that have a primary business focus on the generic drug industry,” according to VanEck.
GNRX is a global healthcare ETF with exposure to a dozen countries. While the U.S. accounts for 37% of the fund’s weight, GNRX features significant emerging markets exposure via India and China, among others.
iShares U.S. Healthcare Providers ETF (IHF)
Expense Ratio: 0.43%
The iShares U.S. Healthcare Providers ETF (NYSEARCA:IHF) has been previously highlighted in this space and has been solid though not spectacular this year. Perhaps more than any other sector, healthcare is affected by politics, and politicians that are angling for the White House in 2020 are really hindering IHF this year.
Regardless of how one votes, recent price action in IHF confirms the healthcare ETF’s holdings do not like the idea of Medicare For All, an idea being supported by several Democrats seeking their party’s 2020 presidential nomination. Making matters worse, some politicians recently cheered the declines experienced by IHF components.
Cooler heads are likely to prevail and some market observers are endorsing the idea of using the dip to buy some of the names residing in IHF.
Fidelity MSCI Health Care Index ETF (FHLC)
Expense Ratio: 0.084%
For long-term investors who want a basic approach to healthcare ETFs, the Fidelity MSCI Health Care Index ETF (NYSEARCA:FHLC) is the name to consider. While the arena of standard healthcare ETFs is chock full of worthy competitors, FHLC stands out for a simple reason: it is, at least for the time being, the cheapest healthcare ETF in the U.S.
What investors get with a healthcare ETF like FHLC is heavy exposure to blue-chip pharmaceuticals stocks, medical equipment makers and large-cap biotechnology companies.
Every basis point saved in fees matters to long-term investors, which increases the allure of FHLC. Plus, Fidelity clients can transact in this and other Fidelity ETFs commission-free.
SPDR S&P Health Care Equipment ETF (XHE)
Expense Ratio: 0.35%
The SPDR S&P Health Care Equipment ETF (NYSEARCA:XHE) is an equal-weight rival to the aforementioned IHI. Equal-weight funds, particularly sector products, often tilt toward to smaller stocks, which can be an advantage of in a high-growth segment such as medical equipment.
The $619 million XHE has a weighted average market capitalization of $15.6 billion, putting it at the lower end of large-cap territory. None of this healthcare ETF’s 69 holdings exceed weights of 2.6%. While the cap-weighted IHI is beating the equal-weight XHE this year, XHE is beating its rival by nearly 700 basis points over the past 36 months.
Underscoring the notion that medical equipment is a growth segment, XHE has a price-to-earnings ratio of 32.54, implying a significant premium to traditional healthcare ETFs.
Todd Shriber does not own any of the aforementioned securities.
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