Broader health care exchange traded funds have are rebounding from the late first quarter/early second quarter declines brought on by the biotechnology sell-off.
The health care sector, the S&P 500’s third-largest sector weight behind technology and financial services, remains fundamentally sound, but investors may want to temper expectations of out-sized near- to medium-term gains.
“Profit growth it is forecast to rebound this year on better-than-usual sales growth. However, P/E multiples have risen considerably over the last two years as the Health Care sector has been revalued by investors, and multiples now exceed their pre-crisis levels. Higher share prices have in turn diminished the sector’s attractiveness to slightly below average in our opinion,” said AltaVista Research in a new research note.
Valuation is not an unfamiliar concern facing health care stocks and the relevant exchange traded funds. In February, several weeks before the biotech sell-off started in earnest, the Health Care Select Sector SPDR (NYSEArca: XLV) was seen sporting a P/E ratio slightly in excess of the Consumer Staples Select Sector SPDR (NYSEArca: XLP). [Health Care ETFs Dealing With High Valuations]
That was the first time in eight years health care stocks were more expensive than staples. Although it was not among the nearly 220 ETFs that hit new 52-week highs Monday, XLV, the largest health care ETF, is higher by nearly 4% over the past month. The ETF closed at $59.87 Monday, just 63 cents below its 52-week high.
AltaVista rates XLV neutral, indicating average appreciation potential. That is the rating the research firm assigns to the bulk of the 800 ETFs in its coverage universe.