Health Care Heaven: Sector’s ETFs Flex Their Muscles

February 14th at 8:00am by Todd Shriber

Forty-seven exchange traded funds hit all-time highs on Thursday. In a testament to the ongoing strength of the health care sector, now the third-largest in the S&P 500, 16 of the ETF’s touching all-time highs yesterday were health care funds.

This is not a new phenomenon. In three-year period ending Feb. 12, the Health Care Select Sector SPDR (NYSEArca: XLV), the largest health care ETF by assets, surged 89% while the S&P 500 was up “just” 46.5%. In each of the past three years, the iShares Nasdaq Biotechnology ETF (NasdaqGS: IBB) was one of the top 10 non-leveraged sector ETFs. [Sector Rotation With ETFs]

Last year, three of the 10 best non-leveraged sector ETFs were health care-related funds. In 2011 and 2012, four of the top 10 sector ETFs were health care plays, according to Dorsey Wright data.

With anecdotes like those, some investors may wonder if health care stocks and ETFs are nearing the end of their stellar run. An argument can be made that health care has more upside to deliver.

“Although the sector faces top-line pressure from patent expirations, increasing generic drug penetration and European austerity cut-backs, we believe overall industry profits should hold up relatively well, helped by expanding sales of new innovative drug therapies, emerging market sales and margin improvements accruing from cost restructurings and merger synergies,” said S&P Capital IQ Director of ETF & Mutual Fund Research Todd Rosenbluth in an interview with ETF Trends.

“Also, increasing biotech M&A, still relatively low HMO utilization rates, attractive pharmaceutical sub-industry dividends and more efficient R&D spending help offset the aforementioned negative. Further, the Affordable Care Act has been a positive for the sector adding to the insured population, which is good for pharmaceutical and biotechnology companies which are the two biggest sub-industries.”

While there has been increasing talk of a “biotech bubble,” chatter that seems to lump biotech stocks into the same category as E-Toys, the industry remains a driving force behind health care’s run higher. Three of the five major biotech ETFs were among the 16 health care ETFs to hit all-time highs Thursday. [The Right ETF for Biotech M&A]

IBB was not among that trio, but the PowerShares Dynamic Biotechnology & Genome Portfolio (NYSEArca: PBE). PBE is the eighth-best PowerShares ETF in terms of year-to-date inflows, according to issuer data. S&P Capital IQ has strong buy ratings on Gilead (NasdaqGM: GILD) and Celgen (NasdaqGM: CELG), a combined 14.5% of IBB’s weight.

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