As highlighted by the 15.6% year-to-date gain for the Health Care Select Sector SPDR (NYSEArca: XLV), the health care sector is the S&P 500’s top performer this year.
XLV, the largest health care ETF by assets, is up 2.8% over the past month. That move has helped solidify XLV’s status as the best performer of the nine sector SPDR ETFs. XLV entered Thursday’s session with a 2014 gain of 15.6%, indicating the ETF has recently been separating itself from its nearest rivals, the Energy Select Sector SPDR (NYSEArca: XLE) and the Utilities Select Sector SPDR (NYSEArca: XLU), which are up an average of 13.6% this year. [Technical Take on a Big Health Care ETF]
For the investor that prefers strategic beta, or non-cap weighted sector exposure, the First Trust Health Care AlphaDEX Fund (NYSEArca: FXH) merits a place in the health care ETF conversation. FXH has proven as much, surging 17% year-to-date on its weight to a new all-time high on Thursday. Like XLV, FXH has been a prolific asset gatherer in the third quarter as investors have again embraced the idea of adding some risk to their health care holdings.
While XLV has added almost $180 million in new assets since the start of July, FXH has tacked on a not-too-shabby $140.1million. Somewhat quietly, FXH has added $505.1 million in fresh assets this year, a figure that works out to be over 22% of the ETF’s current assets under management total of $2.25 billion. [Investors Get Tactical With Sector ETFs]
As a strategic beta ETF, FXH differs noticeably from its cap-weighted counterparts, such as XLV.
“FXH’s portfolio also has more of a small- and mid-cap tilt than its competitors, with fully 47% of assets invested in mid-cap firms and another 9% devoted to small-cap companies,” said Morningstar analyst Robert Goldsborough in a new research note.
FXH also features a significant underweight to pharmaceuticals makers compared to cap-weighted health care ETFs. That is to say investors should not expect an ETF heavy on Johnson & Johnson (NYSE: JNJ), Pfizer (NYSE: PFE) and friends with this fund. FXH’s weight to pharma companies is just 18.4%, compared to 44.2% for XLV.
On that note, investors should also that several of FXH’s pharma holdings are more growth than value plays. The ETF’s top-two holdings are Mallinckrodt (NYSE: MNK) and Salix Pharmaceuticals (NasdaqGS: SLXP). The former is one of the most heavily shorted stocks on Wall Street, the latter has been mentioned as a takeover target. Both are considered hedge fund darlings. [ETFs for Hedge Fund Pharma Darlings]
“FXH has a slightly lower tilt toward quality companies than its market-cap-weighted brethren; some 22% of FXH’s assets are invested in wide-moat firms, and another 39% are invested in narrow-moat companies. FXH charges 0.70%. Morningstar’s analysts do not cover enough of the firms held in FXH to develop an estimate of fair value,” according to Goldsborough.
FXH has also benefited from the resurgence of biotech stocks with a 15.4% weight to that industry group. That biotech weight is 570 basis points less than XLV’s allocation to the group. However, FXH has teamed with the First Trust NYSE Arca Biotechnology Index Fund (NYSEArca: FBT) to drive the First Trust Dorsey Wright Focus 5 Fund (NasdaqGM: FV) higher in recent weeks. FV is up 5% in just the past month due in large part to its combined 43.6% weight to FBT and FXH. [Momentum Rebound Lifts This ETF]
First Trust Health Care AlphaDEX Fund
