ETF Trends
ETF Trends

It is not hyperbole to say 2013 was the year of the health care exchange trade fund. Multiple anecdotes prove the point.

Not only was the Health Care Select Sector SPDR (NYSEArca: XLV) the second-best of the nine sector SPDRs, but four biotechnology funds were among 2013’s 10 best non-leveraged ETFs. The strength has carried into 2014 as three biotech ETFs are among this year’s 10 best ETFs and XLV is already up nearly 3% while the S&P 500 has traded lower. [The Best ETF for Biotech Takeover Targets]

“We attribute the recent strength to a number of factors, most notably to a winding down of the unprecedented wave of patent expirations sustained in 2012, resurgence in new product launches and positive developments on the R&D front,” said S&P Capital IQ in a recent research note.

The research firm is generally bullish on the health care sector, although “average P/Es in the drug sector have come up over the past 12 months, with multiples based on 2013 projections for normalized EPS averaging near 14X, closer to market multiples,” according to S&P Capital IQ.

In terms of individual stocks, S&P has a five-star rating on biotech giant Gilead Sciences (NasdaqGM: GILD). Gilead, a major holding in ETFs such as the iShares Nasdaq Biotechnology ETF (NasdaqGS: IBB) and the Market Vectors Biotech ETF (NYSEArca: BBH), is up more than 7% to 2014 and a touched a new all-time high Tuesday.

S&P Capital IQ also has four-star ratings on Dow components Merck (NYSE: MRK) and Pfizer (NYSE: PFE).

“Pharma dividends are highly attractive, in our view, with average yields ranging in the 3%-5% area. We believe strong cash flow generation should provide support for dividends, which remain a high investor priority,” said S&P in the note. “Pharmaceutical companies over the past five years have embarked on a number of strategies aimed at rejuvenating long-term growth. These strategies have included aggressive pricing, especially in specialty drugs; increased emphasis in expanding in rapidly growing emerging markets; and aggressive cost streamlining measures. Many large players, such as Merck and Pfizer, are also propping up their stocks and augmenting EPS through aggressive stock repurchase programs.”

S&P also has a four-star rating on AbbVie (NYSE: ABBV) and three-star ratings on Bristol-Myers Squibb (NYSE: BMY) and Eli Lilly (NYSE: LLY). Pfizer, Merck, Abbvie and Bristol-Myers combine for almost 24% of XLV’s weight. S&P rates the largest health care ETF by assets overweight. [Two Sector ETFs That Should Rise in January]

The rival iShares U.S. Healthcare ETF (NYSEArca: IYH) is also rated overweight by S&P Capital IQ. The aforementioned, excluding Eli Lilly, stocks are all top-seven holdings in IYH, combing for over 26% of the $1.99 billion ETF’s weight.

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