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Why The Rate Cut Could Help Healthcare ETFs

This article was originally published on ETFTrends.com.

When it comes to sectors that often benefit from lower interest rates and declining Treasury yields, investors usually think of high dividend, defensive groups such as real estate and utilities. However, some market observers believe another defensive is poised to rally in the wake of the Federal Reserve's latest cut.

The Health Care Select Sector SPDR ETF (XLV) , the largest exchange traded fund (ETF) dedicated to the sector is trailing other sectors and the S&P 500 this year, but healthcare is attractively valued relative to some other defensive groups.

Among other factors, XLV and friends have been dogged this year by speculation that Medicare For All could become a reality if Democrats win the White House in 2020. Many of the most visible Democratic contenders for that party’s 2020 presidential nomination are embracing Medicare For All.

“Health care, the worst-performing sector this year, trades at 15 times forward earnings, below the 17 times multiple on the S&P 500. By comparison, staples, utilities and REITs trade closer to 20 times earnings,” reports CNBC.

Inklings Of A Comeback

Investors embraced healthcare stocks for the sector’s growth and defensive characteristics, providing investors with yields and valuations that are less stretched than other yield-producing stocks like utilities. Some market observers believe the sector’s selloff is overdone and that healthcare stocks could be poised to bounce back.

“Within in health care, you really can have an opportunity for both growth as well as defensive subindustries, subsectors. Looking at biotechnology, that’s really the growth area of health care,” said Chris Zaccarelli, chief investment officer at Independent Advisor Alliance, in an interview with CNBC. “Meanwhile, if you look at medical device manufacturers and services companies within health care, it’s growing at a slower rate, around mid-single-digits growth, but it provides much more defensive characteristics.”

The $17.21 billion XLV “seeks to provide precise exposure to companies in the pharmaceuticals; health care equipment and supplies; health care providers and services; biotechnology; life sciences tools and services; and health care technology industries,” according to State Street.

Pharmaceuticals and medical equipment companies combine for 57% of the fund's weight.

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

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