ETF Trends
ETF Trends

After being last year’s top-performing sector, health care has fallen on some hard times this year thanks in large part to a significant affecting biotechnology stocks, but some market observers see the health care space rallying into year-end.

Looking ahead, in the years through 2024, spending growth is projected to average 5.8% and peak at 6.3% in 2020.

Additionally, the actuaries calculated that around 8.4 million Americans became insured in 2014 and noted their increased use of medical services. The number of people on Medicaid is projected to increase to 78.1 million by 2024, outstripping Medicare, which is expected to have 70.3 million enrolled. [Healthcare ETFs: Specialized Drugs in Greater Demand]

Earlier this year, U.S. healthcare conglomerate Johnson & Johnson (NYSE: JNJ), a major holding in exchange traded funds such as the Health Care Select Sector SPDR (NYSEArca: XLV), 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]

“The health-care flush threatens a flat year for the sector just as S&P recoups YTD losses.

This is a remarkable turn in relative performance as HC was 10% points ahead of an all year flattish S&P in mid August. We find this reversal unwarranted and think health care could surge into year-end. If not, it’s set up to be the best performing sector in 2016. Health Care is 14.7x 2016E EPS vs. S&P at 16x. We expect 6% sales growth from HC in 2016, well above nominal GDP and S&P sales growth. HC has margin risks, but also upside potential. We expect 6-9% EPS growth. We doubt the S&P delivers better growth,” Deutsche Bank’s David Bianco in a note posted by Chris Dieterich of Barron’s.

The Affordable Care Act has helped millions of Americans receive healthcare coverage, with the uninsured rate now at a seven-year low, bolstering the outlook for healthcare services and sector-related exchange traded funds.

In the second quarter, only 11.4% of adults lacked some form of health insurance, a half-percentage point dip from the first quarter, reports Dan Mangan for CNBC.

The uninsured rate has declined almost 6 percentage points since late 2013, before the the ACA, or Obamacare, took effect. More Americans gaining access to health insurance could bolster the long-term thesis for the iShares U.S. Healthcare Providers ETF (NYSEArca: IHF).

Health Care Select Sector SPDR

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.