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Health Day Checkup of Medical ETFs: 5 Top Picks

Sanghamitra Saha
Despite several downsides, Chemed (CHE) witnesses solid revenue growth across key subsidiaries - VITAS and Roto-Rooter.

The biggest healthcare ETF Health Care Select Sector SPDR Fund XLV has beaten the S&P 500 in the one-year period and has matched the performance in the two-year and five-year frame.  Though this broader healthcare fund lagged the S&P 500 this year, one of its specialized corners – biotech – easily topped it. SPDR S&P Biotech ETF XBI is up 28% this year, trumping the S&P 500 (up 14.9%).

Let’s do a health checkup of the sector itself before the World Health Day on Apr 7.

M&As

Mergers and acquisitions (M&As) are the wind beneath the wings of the sector. The U.S. healthcare supply chain is consolidating fast, with deals across the industry ranging from insurers, pharmacies to drug distributors. Thanks to an uptick in M&As, biotech stocks have seen their best ever start to a year since 2012.

The announcement of the mega merger deal between Bristol-Myers BMY and Celgene CELG at the beginning of 2019 set the space on fire.  Also, Eli Lilly and Company LLY has announced that it will acquire Loxo Oncology for $8 billion to expand oncology portfolio. The winning momentum started from December 2018, when Glaxo GSK offered to buy TESARO for almost $5.1 billion.

Roche and Biogen followed suit with the acquisition offers for Spark Therapeutics ONCE and Nightstar Therapeutics NITE, respectively. Also, Pfizer collaborated with the privately-held Vivet Therapeutics. Notably, heightened speculation about increasing consolidation in the cancer space is doing rounds. Analysts have predicted a sizable increase in M&A activity in both drugmakers and medical device corners in 2019.

Q1 Earnings Growth Picture Positive for Medical

First-quarter 2019 earnings growth is expected to turn negative, per Earnings Trends issued on Apr 3, 2019. This would mark the first earnings decline since second-quarter 2016. Margin pressure acted as headwind but revenues continued to grow.

There are very few sectors that are expected to witness earnings growth for the first quarter, and Medical has made it to the winners’ list with a likely earnings growth rate of 2.7%. The sector is likely to witness a revenue growth of 5.9%.   

Upbeat Zacks Rank

The broader medical sector belongs to a top-ranked Zacks sector (top 19%).The sector has been creating solid jobs for a few months in a row. It, overall, saw an annual increase of 361,000 jobs in February (read: Job Growth Almost Halts in US: Sector ETFs in Focus).

The Medical - Biomed/Genetics sub-industry currently belongs to the top-ranked Zacks industry (top 30%) while Medical – Products & Instruments is in the top 39%. Medical Services also belongs to a top-ranked Zacks industry (top 40%) while Generic Drugs is in top 41%.

Against this backdrop, below we highlight few top-ranked ETFs picks  (see all Health Care ETFs here).

VanEck Vectors Biotech ETF BBH – Zacks Rank #1 (Strong Buy)

The underlying MVIS US Listed Biotech 25 Index tracks the overall performance of companies involved in the development and production, marketing and sales of drugs based on genetic analysis and diagnostic equipment (read: Top-Ranked ETF Winners in Dow's Longest Rally in 24 Years).

Vanguard Health Care ETF VHT – Zacks Rank #1

The underlying MSCI US Investable Market Health Care 25/50 Index is made up of stocks of U.S. companies within the health care sector. Pharma, healthcare equipment and biotech take the major share of the fund.

iShares U.S. Healthcare ETF IYH – Zacks Rank #1

The underlying Dow Jones U.S. Health Care Index measures the performance of the healthcare sector of the U.S. equity market. Pharmaceuticals, Health Care Equipment, Biotechnology and Managed Health Care are the top our spots of the fund.

First Trust NYSE Arca Biotechnology Index Fund FBT – Zacks Rank #2 (Buy)

The fund measures the performance of a cross section of companies in the biotechnology industry that are primarily involved in the use of biological processes to develop products or provide services.

Principal Healthcare Innovators Index ETF BTEC – Zacks Rank #2

The underlying Nasdaq U.S. Healthcare Innovators Index provides exposure to U.S. companies that are early stage healthcare companies.

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