Another strong year for health care stocks and exchange traded funds has the third-largest sector weight in the S&P 500 positioned to be the second-best sector performer in the benchmark U.S. index.
Five of the top 10 sector ETFs in 2014 are health care funds. Health care’s out-performance is not new. Over the past three years, the average number of health care funds among those years’ 10-best sector ETFs is over three. [Dominant Health Care ETFs]
With that broad-based strength, it is reasonable to expect an array of health care ETFs are getting in on the fun and that has been the case this year as cap-weighted sector funds, industry ETFs with narrower focuses and strategic beta offerings have all offered investors plenty to cheer about.
One of the shining stars among strategic beta health care ETFs has been the First Trust Health Care AlphaDEX Fund (NYSEArca: FXH). The $2.6 billion FXH, which debuted in May 2007, 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.
Said another way, FXH is smart beta rival to cap-weighted offerings such as the Health Care Select Sector SPDR (NYSEArca: XLV). The differences in weighting methodologies can create significant return disparities and that much has been seen this year with FXH up 27.1%, or 200 basis points ahead of XLV. As of the end of October, 88% of XLV’s 55 holdings are found in FXH while 59% of FXH’s constituents also resided in FXH. [Performance Similarities Among Different Health Care ETFs]
“Interestingly, despite not explicitly targeting industry group diversity in its methodology, FXH has quite a diverse range of industry groups in the healthcare sector, with the largest industry group (health care facilities) occupying only 14% of the total allocation,” according to a post by Stanford Chemist on Seeking Alpha.