Plenty of sectors have endured negative revisions to first-quarter earnings expectations. Healthcare, the third-largest sector weight in the S&P 500, is not one of those sectors.
“Healthcare remains in favor as forecasts for first quarter earnings look to be best in breed within the S&P 500, with M&A activity also providing a tailwind. Within the sector, the Biotech industry experienced a volatile March despite a close to 3% gain for the month. Biotech continues to be the focus of bubble talk after such a strong run, but analysts estimate another strong quarter of earnings growth in Q1,” said State Street Global Advisors in a note out Monday.
While the healthcare sector’s first-quarter are expected to be, well, healthy, the biotechnology sub-sector is not the only driver of the broader healthcare space’s robust earnings expectations. Investors would do well to look to the healthcare services industry and exchange traded funds, such as the SPDR S&P Health Care Services ETF (NYSEArca: XHS).
“XHS offers inexpensive earnings growth with favorable long-term prospects driven by demographics,” said State Street Global Advisors Head of Research David Mazza an email exchange with ETF Trends.
The equal-weight XHS, home to 56 stocks and $161.3 million in assets, offers investors exposure to several rapidly-growing healthcare sub-sectors, including facilities operators and managed care providers in addition to services providers. Unlike traditional cap-weighted healthcare services ETFs, XHS is not overly dependent on UnitedHealth (NYSE: UNH), Cigna (NYSE: CI) and Aetna (NYSE: AET) as drivers of its returns. In fact, only Cigna from that trio is a member of XHS’ top 10 lineup. [Hospital ETF Could Surge Again]
As been previously noted, XHS’ advantage comes by way of its robust exposure to hospital stocks. The ETF allocates 29% of its weight to healthcare facilities operators and another 21.5% to managed health care providers. Some investors may not want to hear it, depending on their personal politics, but Obamacare has made those exposures in XHS all the more beneficial. [ER ETF Could Rally Again]
Despite a lengthy run up in those stocks, broadly speaking, they are not excessively valued.
“Health care service firms trade at a forward P/E of 20.3x, 2% below their 5-year average,” adds Mazza. “The industry is forecasted to have 14% EPS growth over the next 3-5 years, while the rest of the market is projected to be 11%.”
XHS, which is up 11.2% this year and 33.1% over the past year, also offers investors industry exposure to the strong dollar and other prominent investment themes.
“These firms have a low sensitivity to the dollar as they are predominantly domestically-oriented with low percent of foreign sales,” said Mazza. “An aging population transforms health care to be a necessity as more Americans may need extended care as well as ongoing medical services from chronic, but treatable diseases, such as diabetes and obesity.”
SPDR S&P Health Care Services ETF
