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Healthcare ETFs Could be a Fine Q3 Idea

This article was originally published on ETFTrends.com.

Broadly speaking, the healthcare sector, the third-largest sector weight in the S&P 500, has been a solid performer this year. Within the sector, medical device and equipment manufacturers are among the best-performing stocks.

Just look at the SPDR S&P Health Care Equipment ETF (XHE) . That exchange traded fund is up over 27% year-to-date while the S&P 500 Health Care Index is higher by a bit over 5%.

The equal-weight XHE tracks the S&P Health Care Equipment Select Industry Index, which provides “exposure to the health care equipment segment of the S&P TMI, which comprises the following sub-industries: Health Care Equipment and Health Care Supplies,” according to State Street Global Advisors (SSgA).

Industry observers argue that medical technology companies can tap into increased healthcare spending among emerging economies while the U.S. market has matured and could experience slower growth. Looking ahead, in the years through 2024, spending growth is projected to average 5.8% and peak at 6.3% in 2020.

Why Now For XHE

As an equal-weight ETF, XHE tilts toward smaller companies, indicating the fund can benefit from the soaring small-cap theme. The fund's 72 holdings have a weighted average market value of $14.37 billion, which is significantly lower than cap-weighted medical device ETFs.

“By tilting exposure toward US small-cap companies, investors may be able to focus on domestic opportunities that offer the potential to remove sensitivity to trade-related conflicts,” said SSgA in a recent note. “US small-cap companies generate 80% of revenue within the US, compared to 62% for US large-cap companies. 2 Small-cap stocks have outpaced large caps by 4.8% year to date as trade tensions have increased alongside a strengthening US dollar, which can lower the value of foreign sales.”

Related: ARK Genomics ETF Jumps 30.5% YTD

Market observers have pointed to a number of reasons for the increasing momentum in the small-caps, compared to their larger peers. For instance, geopolitical risks, a stronger U.S. dollar and rising trade tensions have contributed to a murkier outlook for large multinational companies, whereas small-caps have benefited from deregulation and ongoing domestic growth.

“Within the small cap space, we found health care equipment industry presented an attractive growth opportunity,” said SSgA. “Since the first quarter of 2017, health care equipment has followed a growth trajectory, posting its fourth consecutive double-digit earnings growth in the first quarter of this year.”

For more information on the healthcare sector, visit our healthcare category.

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