Investors have shunned healthcare stocks and sector-related ETFs during a U.S. presidential election year, but things might turn out differently this time around.
The spotlight is already shining over the healthcare sector as Democratic candidates argue among themselves over the finer details of a potential “medicare for All” while President Donald Trump pledged to “never let socialism destroy American healthcare” at his State of the Union address earlier this month, the Financial Times reports.
However, the potential for political risk to affect the healthcare sector should not dissuade investors. Any major healthcare policy changes will unlikely go through a divided Congress, and more importantly, the sector will continue to find fundamental support over the long-term from increased drug innovation and an aging U.S. population.
Over the past two years, around 100 new drug approvals were granted in the U.S. alone, with most of the innovation related to genomics.
“We are in an era of pretty strong research and development productivity and where regulators are more accommodating, rather than less, in terms of approving new drugs,” Marshall Gordon, a senior research analyst at ClearBridge Investments, told FT.
In a decade, all baby boomers in the U.S., or 70 million Americans, will be older than 65, so the healthcare sector will experience a boom in potential clients as an aging demographic increases spending in the coming years. The Centers for Medicare and Medicaid Services calculated that national health spending will grow at an average rate of 5.5% per year until 2027 when it will hit almost $6 trillion.
Vinay Thapar, portfolio manager for US growth equities at asset manager AllianceBernstein, argued that the healthcare sector exhibited both defensive characteristics and “secular growth” potential due to demand and product development. “Few if any other defensive sectors have this unique combination,” Thapar said.
Furthermore, 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.
ETF investors can also gain exposure to this market segment through sector-specific ETF plays, such as the Health Care Select Sector SPDR ETF (NYSEArca: XLV), Vanguard Health Care ETF (NYSEArca: VHT) and iShares US Healthcare ETF (NYSEArca: IYH).
For more information on the market sectors, visit our sector ETFs category.