Healthcare sector exchange traded funds have been outpacing the broader markets and could remain healthy as rising profits diminish concerns over frothy valuations.
Over the past year, Health Care Select Sector SPDR (NYSEArca: XLV) rose 25.2% while the SPDR S&P 500 ETF (NYSEArca: SPY) gained 17.1%. Year-to-date, XLV is up 2.5% and SPY is 0.6% higher.
Specialized drug treatments, an aging population and industry-wide consolidation, among other factors, will continue to help healthcare stocks, reports Eric Platt for Financial Times.
“More than any other sector, healthcare is benefiting from strong demographic and secular trends: aging population, expanding insurance coverage, growing middle-class around the world, new product launches,” Dubravko Lakos-Bujas, equity strategist with JPMorgan, said in the Financial Times article.
Strong earnings results will support the healthcare sector’s rising prices. Healthcare companies reported organic growth of all sectors, including 11% revenue growth and 22% earnings growth over the fourth quarter. Looking ahead, S&P Capital IQ projects S&P 500 healthcare earnings per share to rise 8.9% in 2015 year-over-year, compared to a 1.7% gain in the broader blue-chip index. [Healthcare Services ETFs Strengthening on Larger Client Base]
Barclays strategists also point out that the biotech sub-sector has been a significant contributing factor to earnings growth within the healthcare industry. Over the past year, the iShares Nasdaq Biotechnology ETF (NasdaqGS: IBB) rose 27.2% and Market Vectors Biotech ETF (NYSEArca: BBH) increased 21.9%. The biotech sub-sector makes up 20.3% of XLV’s holdings. [Gilead Could Goose Biotech ETFs]
“Our conviction level is high on the industry given what we believe will be another strong year for biotech innovation and a differentiated earnings growth profile versus the broader markets,” Geoffrey Meacham, an analyst with Barclays, said in the Financial Times article.
Moreover, merger and acquisition activity will strengthen valuations. As the market anticipates more deals ahead, consolidations have provided a floor on share prices. Fueling further M&A activity, Marshall Gordon, senior healthcare analyst at ClearBridge Investments, argues that large companies still need to acquire more products, especially as large blockbuster drug patents expire, and financing remains inexpensive. [Best Biotech ETF Gets a Lift From Merck’s Cubist Buy]
Health Care Select Sector SPDR
For more information on the healthcare sector, visit our healthcare category.
Max Chen contributed to this article.