June is not the ideal month of the year in which to be long stocks. Historical data confirms as much as the SPDR S&P 500 ETF (NYSEArca: SPY) averages negative returns in June and the only one of the nine sector SPDR exchange traded funds to average a June gain is the Utilities Select Sector SPDR (NYSEArca: XLU).
Already up nearly 10% year-to-date, XLV is by far the best performer among the nine sector SPDRs and although the ETF averages modest June losses, there are good reasons to give the fund a look this month.
“Dating back to 1990, the S&P 500 Index has risen only 1.6% on an annualized basis during the May-October period, relatively weak compared to other six month periods. However, the Health Care sector has risen 5.2%, the strongest of the ten sectors, and outperformed the broader market 65% of the time,” said S&P Capital IQ in a new research note.
Over the past decade, the biotechnology industry has offered impressive out-performance during the summer months, which could be an important catalyst for XLV because the ETF allocates over 20% of its weight to biotech stocks. XLV has averaged small July and August gains. [Biotech ETFs Could be hot This Summer]
“From a sub-industry perspective, Pharmaceuticals makes up roughly 42% of XLV’s assets, followed by Biotechnology’s 21%, Health Care Equipment’s 14% and Managed Care’s 9%. But XLV’s recent top-10 holdings make up 54% of overall assets, making the ETF’s performance highly dependent on a handful of mega-cap securities, in our view. Part of why S&P Capital IQ is so favorable on XLV is our view on the valuation and risk consideration of these securities,” said S&P Capital IQ.
The research firm has four-star ratings on Dow components Johnson & Johnson (NYSE: JNJ) and United Health (NYSE: UNH), two of XLV’s top 10 holdings, as well as the two biotech stocks found among XLV’s top 10 – Amgen (NasdaqGS: AMGN) and Biogen (NasdaqGS: BIIB). [This Healthcare ETF can Climb Some More]
Last month, J&J announced that in the next four years, it expects to submit over 10 new medicines, which could potentially generate $1 billion in annual revenue each, Reuters reports. Later this year, J&J plans to file for approval for the experimental drug daratumumab for multiple myeloma, a type of blood cancer, in the U.S. and Europe. Wells Fargo analyst Larry Biegelsen projects daratumumab sales could hit $1.3 billion by 2019. [Innovators Lift Healthcare ETFs]
J&J “is a Buy recommended stock with an A+ Quality Ranking and AAA credit rating. Jeffrey Loo, S&P Capital IQ head of health care equity research, thinks the stocks remains undervalued on a P/E basis. He noted that in mid-May JNJ said it plans 10 new drug filings through 2019, each with a potential to reach $1B in annual sales. Interestingly to Loo, JNJ says it plans to file for U.S. and European Union (EU) approval for a drug that has breakthrough therapy designation, in double refractory multiple myeloma, by year-end, based on Phase II data it plans to present at a major clinical oncology conference in a few weeks. With these new products, along with recently approved drugs, JNJ believes its drug sales will grow above industry average, at least through 2019. JNJ, which sports a 3.0% yield, raised its dividend 7% in April,” according to S&P Capital IQ.
Health Care Select Sector SPDR