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A Healthy Outlook For Healthcare ETFs

This article was originally published on ETFTrends.com.

Traditional healthcare exchange traded funds have been solid though not spectacular in the first quarter. For example, the iShares US Healthcare ETF (IYH) , which tracks the Dow Jones U.S. Health Care Index, is higher by about 7% this year.

The $2.34 billion IYH devotes about 53% of its combined weight to pharmaceuticals and medical equipment stocks. There are other catalysts to consider, including that the U.S. economy is moving into the late-cycle phase, overall growth may slow and signs of an economic slowdown could pop up. Consequently, investors may also turn to defensive sectors that are less economically sensitive, such as health care.

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.

Along with possessing defensive traits, the healthcare sector also sports quality characteristics, an investment style that is currently receiving renewed attention.

Bullish Views

Last year, healthcare was the best-performing sector in the U.S. and some market observers see reasons why the sector can delivering upside.

“In an environment of slowing growth and less certain earnings outlooks, the resilient earnings growth of healthcare stocks are appealing,” according to BlackRock. “Plus, valuations broadly look reasonable compared to historical levels. Tactical investors may consider getting more granular by focusing on exposure to the medical devices industry.”

While the healthcare sector is not necessarily stretched on valuation, stock pickers ought to be selective in the group, which is the second-largest sector weight in the S&P 500.

IYH has a trailing 12-month dividend yield of 1.85% and a three-year standard deviation of 13.21%, according to issuer data. The fund's price-to-book ratio is 4.30 and its price-to-earnings ratio is almost 25.

“We see a relatively higher share (9%) of 5-star stocks in the drug manufacturing industry. While concern over drug pricing pressures has abated to some extent, we believe the market has still placed too much pressure on potential drug pricing concerns, opening up a couple of significantly undervalued stocks,” according to Morningstar.

For more information on the market sectors, visit our sector ETFs category.