The healthcare sector exchange traded funds have been leading the broader markets and experienced a decent bump after the Supreme Court ruling on Obamacare, and the space could continue to outperform.
Year-to-date, the Health Care Select Sector SPDR (NYSEArca: XLV) gained 12.0%, iShares U.S. Healthcare ETF (NYSEArca: IYH) rose 12.9%, Vanguard Health Care ETF (NYSEArca: VHT) increased 13.6% and Fidelity MSCI Health Care Index ETF (NYSEArca: FHLC) advanced 13.5%. In contrast, the S&P 500 index was up 3.1% so far this year.
“We continue to believe that this health-care trend and outperformance will continue,” Piper Jaffray analyst Craig Johnson said on CNBC.
Medical equipment and hospital stocks recently experienced a decent spike after the Supreme Court ruled in favor of the Affordable Care Act. With the Obamacare subsidies intact, the sector will continue to benefit from a growing client base. [Emergency Room ETF Likes Supreme Court Ruling on Obamacare]
Year-to-date, the iShares U.S. Healthcare Providers ETF (NYSEArca: IHF) surged 23.1% and SPDR S&P Health Care Services ETF (NYSEArca: XHS) jumped 18.5%. Meanwhile, the iShares U.S. Medical Devices ETF (NYSEArca: IHI) increased 7.9% and the SPDR S&P Health Care Equipment ETF (NYSEArca: XHE) rose 10.6%. [Healthcare ETFs: More Americans Are Visiting the Doctor’s Office]
Looking at IHF, Johnson pointed out that “the chart is continuing to make higher highs, higher lows, we’re above our 40-week moving average, above the uptrend support line—we’re not seeing any sign of a trend change happening yet.”
Consequently, Johnson remains long on the sector and on IHF.
Boris Schlossberg, a strategist with BK Asset Management, also argued that the healthcare sector is exhibiting positive momentum and will keep pace after the Supreme Court’s ruling.
“The technicals and the fundamentals really line up, because we clearly have a secular change towards health care, particularly with today’s ruling helping the sector,” Schlossberg said on CNBC.
However, investors will have to watch for meaningful earnings growth ahead as valuations are beginning to look pricey. For instance, XLV shows a price-to-earnings ratio of 22.7 and a price-to-book of 4.0.
“If you have some type of a scare, some type of a retrenchment of stocks, this seems to be an area that could take a pretty good wallop, just because valuations have run so much compared to other areas of the market,” Curtis Holden, senior investment officer at Tanglewood Wealth Management, warned.
For more information on the healthcare sector, visit our healthcare category.
Max Chen contributed to this article.