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Why medical device ETFs could be a safer healthcare investment

Amritpal Khalsa

Healthcare stocks are performing strongly

Healthcare stocks have been among top Wall Street performers this year, and their momentum isn’t looking to subside anytime soon as the industry evolves with the ACA. While investors mainly focus on biotech, pharmaceutical, and provider ETFs, medical device ETFs could be an interesting space to consider.

(Read more: Must-know: Insurance exchanges will affect medical device stocks)

Why consider investing in medical device ETFs?

First, companies competing in this space generally enjoy strong barriers to entry with patent protection, so profit margins are generally safer than other subsectors of healthcare such as pharmaceutical, which is surrounded by the risk of expiring drug patents. The market is also characterized by the sale of larger goods such as MRIs and X-rays, so it’s less volatile because it’s impacted less by changes in the healthcare market. Instead, the medical device market relies on a less volatile, broader economic status. This contrasts directly with more volatile healthcare segments that can see high amounts of volatility in relatively short time.

(Read more: Why the medical device tax repeal bill shouldn’t pass anytime soon)

Medical device ETFs versus other healthcare subsectors

Medical device ETFs started the year well, but they’ve been lagging behind fellow healthcare subsectors. This was largely a result of fears that the Obamacare excise tax would significantly harm the economy. Fortunately, large manufacturers in this space have lessened these worries with their earnings. Companies like Medtronic (MDT), which represents a large allocation of medical device ETFs, showed strong earnings in their latest earnings report and pushed the ETFs higher. Considered a bellwether for the industry, Citigroup Inc. also just increased the company’s target price from $60 to $64 with an upside of 16.7% from the manufacturer’s current price. Other analysts have followed suit, raising MDT’s target price near the company’s Q1 earnings call towards the end of August. This suggests another possible hike in medical ETF prices.

Expect bullish trends in this market

Also, medical device ETFs have historically generated substantial returns starting in August and continuing through the New Year. Medical device manufacturers like Fresenius Medical Care and MAKO Surgical Corp. have seen an approximate 11% return over the past 15 years between August and February.

Look out for possible bullish trends in this market and the possibility for outperformance in the future of this subsector compared to its more volatile counterparts.