While U.S. stocks are beginning to slow, investors can still find opportunities in healthcare sector exchange traded funds.
“A clear sign of strength has yet to emerge from the blurry U.S. economic picture, as uptrends in the housing and labor markets stand in contrast with consumer caution and productivity languor,” according to a BlackRock research note.
Consequently, the money manager has an underweight outlook on U.S. equities.
However, BlackRock maintains a favorable position on healthcare stocks, notably pharmaceuticals, despite concerns that the area has been typically weak in a rising rate environment.
“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 health care in developed countries,” according to BlackRock. “In fact, health care is the best performing sector this year so far despite higher interest rates.”
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. Looking ahead, industry growth will be propelled by a slew of niche or specialized drugs with a targeted application for specific diseases. [Innovators to Support Healthcare Sector, ETFs’ Growth]
Year-to-date, Health Care Select Sector SPDR (NYSEArca: XLV), gained 9.1%, iShares U.S. Healthcare ETF (NYSEArca: IYH) rose 10.1%, Vanguard Health Care ETF (NYSEArca: VHT) increased 10.8% and Fidelity MSCI Health Care Index ETF (NYSEArca: FHLC) advanced 10.7%.
While the sector may seem slightly pricey due to its continued gains this year, investors should keep in mind that the area has a relatively strong outlook on expected profit growth and better earnings momentum, according to BlackRock.
The healthcare ETFs include a large position in pharmaceutical companies. For example, pharma makes up 42.4% of XLV, 40.5% of IYH and 36.8% of VHT.
For a more targeted approach to the healthcare sector, investors can also target pharmaceutical names through the iShares U.S. Pharmaceuticals ETF (NYSEArca: IHE) and Market Vectors Pharmaceutical ETF (NYSEArca: PPH). Year-to-date, IHE was up 14.5% and PPH was 10.9% higher.
For more information on the healthcare sector, visit our healthcare category.
Max Chen contributed to this article.