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Biotech Boom Over? 3 Health Care ETFs to Invest in Instead

Zacks Equity Research

The hot and the soaring biotechnology corner of the broad U.S. health care market endured a steep correction last week. In any case, the space has long been guilty of overvaluation; with even the Fed chair Yellen pointing to it last year. But investors seemed unaffected as the largest biotech ETF iShares Nasdaq Biotechnology (IBB) have added over 22% this year and gained about 50% in the last one-year frame.

However, the bubble had to burst sometime and last week we heard a loud popping noise. IBB was off about 4% and also saw about $522 million in asset outflow last week, per etf.com. Other biotech ETFs witnessed also witnessed a sharp sell-off with BioShares Biotechnology Clinical Trials Fund (BBC) shedding about 7.5%, Medical Breakthroughs ETF (SBIO) losing 6.2% and SPDR S&P Biotech ETF (XBI) retreating 6%.

Though this does not push the biotech space in an outright bear territory, as the area is full of possibilities, investors can take a look at some health care ETFs that bypassed last week’s biotech sell-off.

After all, the sector has no dearth of drivers. The merger and acquisition frenzy, encouraging industry fundamentals, promising new drugs, growing demand in emerging markets, ever-increasing health care spending and Obama care play major roles to make it a lucrative bet for the long term (read: Obamacare is Here to Stay: 3 ETFs to Buy).

These health care ETFs are all Buy-rated, and were in positive territory  last week overruling the biotech correction and could be in watch in the short term, at least until the penchant for biotech investing returns. Investors should note that apart from the trio, the entire health care space was under pressure last week.

PowerShares S&P SmallCap Health Care Portfolio (PSCH)
This ETF delivered spectacular performance in the broad health care world, returning nearly 24% so far this year and was up 1.14% over the last five trading sessions (as of August 10, 2015). The fund offers concentrated exposure to small cap health care securities. It holds 73 securities in its basket, with each security holding less than 3.93% share. From an industry perspective, about one-third of the portfolio is allotted toward health care equipment and supplies, followed by health care providers and services (28.3%) and pharmaceuticals (15.7%).

The ETF has amassed $253 million in asset and trades in lower volume of about 25,000 shares per day, while charging a relatively low fee of 29 bps a year. The fund has a Zacks ETF Rank #1 (Strong Buy) with a High risk outlook (read: 2 Hot Sector ETFs Soaring to Rank #1 This Summer).

SPDR S&P Health Care Services ETF (XHS)

This product uses the equal weight methodology by tracking the S&P Health Care Services Select Industry Index. Holding 59 stocks in its basket, each security accounts for less than 2.3% of total assets. This is often an overlooked fund with AUM of $205 million and average daily volume of about 20,000 shares.
From an industry look, health care services accounts for over one-third of the portfolio while health care facilities, managed health care and health care distributors have considerable allocation. The product charges 35 bps in annual fees. XHS gained about 1% in the last week and returned 18.3% in the year-to-date frame. It also has a Zacks ETF Rank #1 with a Medium risk outlook.

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 51 securities in its basket with major allocations going to United Health and Express Scripts at 12.4% and 7.8%, respectively. Other firms do not hold more than 6.3% of IHF (read: Health Care Provider ETF in Focus on M&A Talks).

The fund has been able to manage more than $1 billion in its asset base while volume is moderate at about 84,000 shares per day on average. It charges 43 bps in annual fees and expenses. The Zacks ETF Rank #1 fund added 0.3% in the last week while it is up over 18% so far this year.
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