Even with the biotechnology meltdown that started late in the first quarter and lasted into the early second quarter, the health care sector is turning in another banner performance in 2014.
Thought the end of the the third quarter, the Health Care Select Sector SPDR (NYSEArca: XLV) was easily the top performer among the nine sector SPDR ETFs, rising 16.5%, according to ETF Replay data. XLV’s performance was 280 basis points better than the second-best SPDR, the Utilities Select Sector SPDR (NYSEArca: XLU), and beat the S&P 500 by a two-to-one margin. [Investors Still Love Health Care ETFs]
“The health-care sector in general and XLV in particular have progressed from a sweet spot to a sweeter spot to an even sweeter spot between June 2012 and September 2014,” writes J.J. McGrath in a Seeking Alpha post.
He goes on to note that lower beta SPDRs, namely XLV, XLU and the Consumer Staples Select Sector SPDR (NYSEArca: XLP) tend to outperform their higher beta counterparts when investors are taking risk off the table, something that is clearly happening right now.
However, there are devils in those details for XLV and rival health care ETFs. Namely, the rise of biotechnology stocks within traditional cap-weighted health care ETFs. While biotech stocks and ETFs were torched earlier this year, the sector roared back, propelling several well-known biotech ETFs to all-time highs in August. [So Much for That Biotech Bubble]
While XLV and comparable health care ETFs are often remembered for their large weights to blue chip pharmaceuticals names, such as Dow components Johnson & Johnson (NYSE: JNJ), Pfizer (NYSE: PFE) and Merck (NYSE: MRK), XLV now has a 20.6% weight to biotech stocks. That is up from about 18% at the start of April. [Health Care ETFs Deal With Biotech Slump]
The biotech exposure can be problematic for health care ETFs in risk-off environments and that much has recently been on display. As stocks have weakened in recent weeks, XLU has now taken the top spot among the nine SPDRs from XLV on a year-to-date basis. Since the start of the fourth quarter, XLV has lagged both XLP and XLU.
Still, the exposure to old school pharmaceuticals stocks is important for XLV. With the recent retrenchment in the Dow, just nine of the index’s 30 components are up at least 10% this year. Two are J&J and Merck, a combined 18.9% of XLV’s weight.
McGrath notes the XLV is coming into a period of seasonal strength with November and December being two of the best months in terms of average performance for the largest health care ETF.
Health Care Select Sector SPDR
