ETF Trends
ETF Trends

The healthcare sector is the third-largest sector in the S&P 500 and has been a primary driver of the current bull market. That is until this year when thanks in large part to struggles by biotechnology stocks, healthcare exchange traded funds of several different varieties have encountered stumbling blocks.

The silver lining is that healthcare has been one of the most beloved sectors during the current bull market, meaning many market observers see the group’s recent pullback as an opportunity to add to or initiate positions in healthcare stocks or ETFs such as the Health Care Select Sector SPDR (NYSEArca: XLV).

Related: Healthcare ETFs Ready to Rally

For XLV and rival healthcare ETFs, the good news is that the U.S. economy moving into the late-cycle phase, overall growth may slow and signs of an economic slowdown could pop up. Consequently, investors may also turn to defensive sectors that are less economically sensitive, such as health care.

Both Democratic presidential front runner Hillary Clinton and GOP hopeful Donald Trump support the right for the government to negotiate Medicare drug costs. Additionally, Clinton has previously stated she would tackle “price gouging” from drugmakers if she is elected.


XLV “is ready to break out the bullish descending wedge. The earnings results from the healthcare sector in the first-quarter 2016 have been strong so far, and M&A activities, which are a key driver, are beginning to pick up. According to the latest Factset Earnings Insight, the healthcare sector is reporting broad-based revenue growth of 9.2% in the first-quarter, the second highest of all ten S&P 500 sectors,” according to a Seeking Alpha analysis of XLV.

Related: These ETFs are Ready to Rebound

Investors seeking high-quality exposure to the health care industry have a number of options available, including XLV, the iShares U.S. Healthcare ETF (NYSEArca: IYH) and Vanguard Health Care ETF (NYSEArca: VHT).

VHT provides similar exposure to XLV, except the Vanguard option includes a broader 340 component holdings, compared to XLV’s smaller 58 stock portfolio. Additionally, VHT has a cheaper 0.09% expense ratio, compared to XLV’s 0.14% expense ratio. However, the Vanguard Health Care ETF is much less actively traded, showing an average daily volume of about 300,000 shares, according to Morningstar data.

“The Healthcare Select Sector SPDR ETF, has been range-bound since mid-2015, underperforming the S&P broader market as political rhetoric ramped up against the pharmaceutical and biotechnology industries from presidential candidates, as well as Congress, on the issue of high drug prices. Speculators have been using the political noise as a backdrop to take short positions against the sector,” adds Seeking Alpha.

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.