The healthcare sector spent ample time in the spotlight last year owing to the coronavirus pandemic. More of the same could be in store for the Health Care Select Sector SPDR ETF (NYSEArca: XLV) this year with the benefit of some added upside.

The largest healthcare ETF by assets, XLV seeks investment results that correspond generally to the Health Care Select Sector Index. The index includes companies from the following industries: pharmaceuticals; health care equipment & supplies; health care providers & services; biotechnology; life sciences tools & services; and health care technology.

The broad health care sector was a strong outperformer as front line workers became the focus of attention amid the Covid-19 pandemic. Small cap equities have been gaining as of late, posting a solid fourth-quarter showing.

“While the largely solid underlying fundamentals of the healthcare sector are likely helping to support the returns, we believe some concerns remain around changes to U.S. healthcare policy, albeit at a lower level than before the November elections,” writes Morningstar analyst Damien Conover. “Overall, we don’t expect any major changes regarding healthcare reform, but rather more moderate changes that target insuring more people and easing some of the patients costs around specialty drugs.”

Get Healthy with XLV in 2021

The healthcare sector appears cheap relative to the broader market as this segment has underperformed the run in the S&P 500. Healthcare stocks were among the second weakest performers among the 11 major sectors on the benchmark index. Looking ahead, healthcare companies are projected to generate annual earnings of 9% and revenue growth of 14%, the highest of all sectors in the S&P 500, according to FactSet data.

XLV is trending higher, buoyed by a round of encouraging news on the coronavirus vaccine front, a fight several of the fund’s components are involved in.

Healthcare spending made up 18% of U.S. GDP, and it is rising. Looking ahead, by 2020, it is projected that global healthcare spending could shoot up to $8.7 trillion as the industry faces increased challenges from an aging population, rising costs, a shortage of skilled workers, legacy I.T. systems, invasive procedures, and medical errors.

“Within the sector, we continue to see the most undervalued firms in the drug manufacturer and managed-care industries. The valuations of these industries seem to imply significant expected changes in U.S. healthcare policies, potentially driven by newly elected politicians,” according to Morningstar.

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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.