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Smaller Works For This Health Care ETF

ETF Professor

Health care stocks and exchange-traded funds jumped last week as Senate Republicans unveiled legislation that would repeal the Affordable Care Act, also known as "Obamacare." While some health care ETFs cooled on Friday, the PowerShares S&P SmallCap Hlth Cr Ptflo (NASDAQ: PSCH) was one of just 11 ETFs not to — and the only health care fund to hit a record high.

The PowerShares S&P SmallCap Health Care Portfolio is the small-cap answer to the Health Care SPDR (ETF) (NYSE: XLV). While many investors have been vexed this year by the performance of U.S. small-caps, PSCH shows getting tactical at the sector level with smaller stocks works. The small-cap health care ETF is up 16.7 percent year to date, or better than triple the returns of the widely followed Russell 2000 Index.

PSCH holdings hail from the S&P SmallCap 600 Capped Health care Index, the small-cap offshoot of the S&P SmallCap 600. That popular small-cap benchmark is higher by just 2.2 percent this year.

What's Driving PSCH Higher

PSCH holds 80 small-cap health care names “providing healthcare-related products and services, including biotechnology, pharmaceuticals, medical technology and supplies, and facilities,” according to PoweShares.

The ETF devotes almost 31 percent of its weight to health care equipment makers and suppliers, one of the best-performing corners of the broader health care universe going back to the start of last year.

Health care providers are 25.5 percent of the ETF's roster.

Investors should note that the newly proposed legislation by Senate Republicans is far from a foregone conclusion and faces significant hurdles before being signed into law.

As Benzinga reported last week, “Despite controlling both chambers of Congress and the Oval Office, the health care legislation is still likely to face a tough fight to get the 51 votes needed for passage (in actuality, the threshold is at 50 votes, as the shoe-in vote of Vice President Mike Pence would bring the total yeas to 51). More moderate Republicans in swing states and arch-conservative lawmakers are divided on key portions.”

It's A Growth Fund

While many traditional health care ETFs, such as the aforementioned XLV, sport average market values that indicate those are large-cap funds, PSCH is not only a small-cap ETF, but a growth fund as well. The average market capitalization of PSCH's 80 holdings is $1.7 billion, putting the ETF at the higher end of small-cap territory, but 70,5 percent of those stocks are classified as growth stocks.

PSCH's price-to-earnings ratio of almost 31 reflects the ETF's growth feel and represents a premium to the Russell 2000.

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