Twenty-eight exchange traded funds hit all-time highs Wednesday. Underscoring the ongoing strength of the healthcare sector, 24 of those funds hailed from the healthcare sector.
That is to say not that they need the help, but healthcare ETFs should be just fine if and when the Federal Reserve finally raises interest rates.
“Health care firms historically have a low sensitivity to the dollar because they are primarily domestically-oriented, with a low percent of foreign sales. Meanwhile, as the US economy improves, more workers will come onto the payrolls, boosting the number of people who enroll in health care coverage and pay insurance premiums. At the same time, an aging population means that health care will become a necessity as older Americans seek extended care options and ongoing treatment for chronic conditions,” said State Street Global Advisors Vice President and Head of Research David Mazza in a recent blog post.
An added bonus is that many large-cap biotechnology and pharmaceuticals names are cash rich. For example, Pfizer (NYSE: PFE) had one of the five largest cash stockpiles among U.S. companies at the end of 2014. [Innovators Lift Healthcare ETFs]
Pharmaceuticals ETFs, including the SPDR Pharmaceuticals ETF (NYSEArca: XPH), could prove durable as interest rates climb. Buoyed by increased mergers and acquisitions activity in the specialty pharma space, XPH is up 21.4% this year and hit an all-time high yesterday.
High-flying biotechnology ETFs should also prove immune to hawkish changes in Fed policy. A recent study by Deutsche Bank indicates major biotech indexes have negative correlations to changes in 20-year U.S. government bonds. Deutsche Bank studied 20 years of data on the Nasdaq Biotechnology Index, IBB’s underlying index, and the NYSE Arca Biotechnology Index, FBT’s underlying index, against 20-year bond rates and “found the correlation at negative 0.78 for the NYSE ARCA Biotech Index while it was negative 0.69 for the NASDAQ Biotechnology Index,” according to Barron’s.
The SPDR S&P Biotech ETF (NYSEArca: XBI), which also hit new highs Wednesday, is up 42% this year. Only one non-leveraged ETF has outpaced the equal-weight XBI this year. [Biotech ETFs: Bring on Rising Rates]
“In the first quarter, the health care sector led all other S&P 500 sectors in earnings and revenue growth. Investors can access this growth either at the broad sector level or at the industry level. Drilling down to the industry level, health care services firms are forecast to have 14% earnings per share growth over the next 3-5 years, compared with 11% for the rest of the market,” said Mazza. “In addition, biotech and pharmaceutical companies are attracting investor attention as the two industries could benefit from favorable demographic trends.”
Investors have added $822.3 million to XBI this year.
SPDR Pharmaceuticals ETF