S&P 500 healthcare stocks barely topped the benchmark index during the last Federal Reserve rate tightening cycle in 2004 through 2006, but 10-year Treasury yields are up 7.42% this year and nine of the top 10 non-leveraged sector ETFs are healthcare funds.
Rising 10-year yields have not stopped the iShares U.S. Healthcare ETF (NYSEArca: IYH) from rising 9.6% this year or the iShares U.S. Pharmaceuticals ETF (NYSEArca: IHE) from climbing more than 14%.
“Although pharmaceuticals and biotechnology stocks have typically underperformed during periods of rising interest rates, this is somewhat offset by several positive structural factors: aging populations, advances in genomics, an accelerating innovation cycle and underutilization of healthcare in developed countries,” according to a recent BlackRock research piece.
For instance, U.S. healthcare conglomerate Johnson & Johnson (NYSE: JNJ) 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.
The shift into research and development comes at a time as big pharmaceutical names brace for large drug patent expirations. Moreover, J&J believes it will sustain above-industry compound annual growth through 2019 – the industry average compound growth rate is expected to be around 3% for the period. Looking ahead, industry growth will be propelled by a slew of niche or specialized drugs with a targeted application for specific diseases. [Innovators Lift Healthcare ETFs]
J&J is almost 9.4% of IHE’s weight while the Dow component commands 9.1% of IYH. The $2.45 billion IYH allocates over 63% of its weight to pharmaceuticals and biotech stocks.
“In fact, health care is the best performing sector this year despite higher interest rates. Valuations may appear stretched on the surface, but this assessment needs to be balanced against relative strong profit growth and better earnings momentum,” notes BlackRock. [Target Financial, Healthcare ETFs]
An added bonus is that many large-cap biotechnology and pharmaceuticals names are cash rich. For example, Pfizer (NYSE: PFE), a top three holding in both IHE and IYH, had one of the five largest cash stockpiles among U.S. companies at the end of 2014.
Last week, the Supreme Court has confirmed the legality of the Affordable Care Act, commonly known as Obamacare with six justices ruling to uphold the sweeping healthcare legislation and three dissenting.
The news was a boon for the iShares U.S. Healthcare Providers ETF (NYSEArca: IHF), one this year’s top 10 sector ETFs and the epicenter of an expected wave of industry consolidation among healthcare providers. [M&A Activity Lifts This Healthcare ETF]
iShares U.S. Healthcare ETF
