The healthcare sector, the third-largest sector weight in the S&P 500, is one of the legitimate leadership groups in the U.S. this year. In fact, healthcare trails only technology in terms of year-to-date performance. For its part, the iShares U.S. Healthcare ETF (NYSEArca: IYH) is higher by 15.5% year-to-date.
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.
“Since its inception, IYH has an average annual return of 7.47%. This is much higher than S&P 500’s return of 4.98% in the same period. The low return for both S&P 500 and IYH was mostly due to the burst of the internet bubble in 2000. IYH’s average annual return in the past 5 years was 17.56%, much higher than S&P 500’s 14.93%. Its average annual 3-year return was 10.53%, slightly higher than S&P 500’s 9.53%. Overall, a $10,000 invested in June 2000 will result in $35,000 today,” according to a Seeking Alpha analysis of IYH.
The $1.9 billion IYH holds nearly 120 stocks and tracks the Dow Jones U.S. Health Care Index. The ETF devotes almost 34% of its weight to pharmaceuticals stocks and another 23% to biotechnology names. Healthcare equipment names, one of the best-performing healthcare industry groups this year, are almost 19% of the fund’s weight.
Related: A Smart Beta ETF Avenue For Healthcare Stocks
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. However, investors must consider the potential risks to the sector associated with Republicans’ efforts to undo the Affordable Care Act (ACA), also known as Obamacare.
“Similarly, the global healthcare spending will also grow by 4.3% annually through 2020. IYH’s portfolio will benefit not only from rising demand in the United States. Many of the companies in its portfolio such as Johnson & Johnson, Pfizer, Gilead Sciences, Allergen, etc. have a significant portion of their revenues come from outside of the U.S.,” according to Seeking Alpha.
For more information on the healthcare sector, visit our healthcare category.