The healthcare sector, the third-largest sector weight in the S&P 500, and the related exchange traded funds such as the iShares U.S. Healthcare ETF (NYSEArca: IYH) are bouncing back this year, but investors considering new positions in the group should carefully consider which parts of the sprawling sector offer compelling value.
The sector dodged a potential hurdle last month when Congress failed to move forward with a package to repeal the Affordable Care Act (ACA), also known as Obamacare. For 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.
Industry observers argue that medical technology companies can tap into increased healthcare spending among emerging economies while the U.S. market has matured and could experience slower growth. Looking ahead, in the years through 2024, spending growth is projected to average 5.8% and peak at 6.3% in 2020.
“Is health care a buy? We think a selective approach is appropriate. Health care has a lower stock correlation than other sectors, reflecting variations in innovation cycles, drug patents and pipelines. That dynamic reinforces the importance of selecting winners and avoiding losers,” said BlackRock in a recent note.
The pharmaceutical and biotechnology sub-sectors may benefit under a Republican president and Congress as the industries are less at risk of price controls that Democrats vowed to impose. The iShares U.S. Pharmaceuticals ETF (NYSEArca: IHE) is up 6% year-to-date. IHE tracks the Dow Jones U.S. Select Pharmaceuticals Index and holds 40 stocks with a significant portion of ETF’s lineup devoted to blue-chip pharmaceuticals such as Pfizer (NYSE: PFE) and Merck (NYSE: MRK).
“A challenge for drug makers is that politicians, regulators and consumers are clamoring to curb growth in drug prices. U.S. prescription drug prices rose 5.2% in 2016, the largest increase since 2001, according to the Bureau of Economic Analysis,” according to BlackRock.
Arguably, pharmaceutical stocks have been resilient this year as Trump, on multiple occasions, has used harsh rhetoric regarding prescription drug prices.
For more information on the healthcare sector, visit our healthcare category.