It probably sounds like a broken record, but the health care sector and its corresponding exchange traded funds are hot.
As has been reported throughout the week, health care ETFs have accounted for a significant percentage of the funds populating the new all-time high club. To be precise, 18 broad health care, biotech, pharmaceuticals, health insurance providers and medical device ETFs made new all-time highs Thursday. That number does not include a plethora of broad-market ETFs with significant and overweight exposure to the health care sector. [Biotech Weight Powers This Pharma ETF]
Two of the health care ETFs that notched fresh record highs yesterday were the Health Care Select Sector SPDR (NYSEArca: XLV) and the First Trust Health Care AlphaDEX Fund (NYSEArca: FXH). In theory, these ETFs should have wide differentials in performance terms despite tracking the same sector.
The reason being is that XLV is a cap-weighted ETF, ideal for the investor looking heavy exposure to blue chip pharmaceuticals stocks along with some well-portioned biotech and medical device exposure. On the other hand, FXH is one of the jewels of First Trust’s AlphaDEX lineup, a group of ETFs whose holdings are selected based on “growth factors including three, six and 12-month price appreciation, sales to price and one year sales growth, and, separately, on value factors including book value to price, cash flow to price and return on assets,” according to First Trust.
Surprisingly, the obvious differences between XLV’s and FXH’s respective methodologies has not created significant performances differences between the two ETFs this year as each is closing in on a 22% year-to-date gain. [Key Differences Among Sector ETFs]
Overlap, though not startling, between the two ETFs explains the almost lockstep performance by the pair. XLV and FXH have 44 holdings in common, according to AltaVista Research. Eighty percent of XLV’s 55 holdings are found in FXH while 59% of FXH’s constituents also reside in FXH.
Interestingly, some of the top-10 overlapping holdings between the two ETFs favor XLV because their soaring market values have made them larger constituents in XLV than FXH. There are several examples where XLV has at least double the weight to star health care stock that FXH has, including Gilead Sciences (NasdaqGS: GILD) and Amgen (NasdaqGS: AMGN).
XLV vs. FXH is just one example, but to be sure, there are other examples where two apparently similar ETFs can offer widely different returns. For example, the First Trust NYSE Arca Biotechnology Index Fund (NYSEArca: FBT) and the iShares Nasdaq Biotechnology ETF (NasdaqGM: IBB) have portfolio overlap of 44%, 500 basis points higher than, XLV and FXH share, according to AltaVista. However, FBT has outpaced IBB by 1,300 basis points this year. [Biotech ETFs Surge to new Highs]
Charts Courtesy: AltaVista Research