Even in an Election Year, Healthcare ETFs can Deliver Some Upside

With 2020 being an election year, it’s not far-fetched to think healthcare ETFs, such as the Health Care Select Sector SPDR ETF (NYSEArca: XLV), will be pinched at some point by political pressures.

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.

“Health Care led earnings sentiment with strong and broad earnings beats and faster growth than the broad market in 2019,” said Matthew Bartolini, Head of SPDR Americas Research, State Street Global Advisors, in a recent note. “As we progress into the new year, analysts have upgraded their earnings estimates for the sector, while projections for the broad market continue their downward trend.”

Other Healthcare Perks

Healthcare and technology sectors are expected to raise earnings this year by roughly 10%, compared to the mid-single digits gains for traditional dividend-generating segments like utilities and REITs.

According to IHS Markit, U.S. total dividends paid out, excluding special dividends, could total a record $663 billion this year, or 7.2% above 2019’s levels.

IHS Markit noted that the health-care sector “has shown a very aggressive capital deployment stance in [fiscal-year 2019] with mergers and acquisitions being the top priority followed by rising cash dividends.”

Additionally, the healthcare sector is attractively valued.

“While the sector rallied in the fourth quarter, Health Care stocks lagged the broad market by more than 10% for the full year,” said Bartolini. “The sector’s forward price-to-earnings is trading within the bottom quintile over the past 15 years, indicating more upside to justify its strong fundamentals.”

Related: The Money Just Keeps on Flowing into ESG Funds 

Previously, investors embraced healthcare stocks for the sector’s growth and defensive characteristics, providing investors with yields and valuations that are less stretched than other yield-producing stocks like utilities. Some market observers believe the sector’s selloff is overdone and that healthcare stocks could be poised to bounce back.

“Health Care stocks may see short-term headwinds as we approach the US presidential election. However, even if a Democratic candidate who campaigned for Medicare-for-all wins the election, the chances of passing the legislation in the near term are unlikely as long as the Senate is controlled by Republicans,” said Bartolini. “In the meantime, investors can take advantage of the temporary mispricing opportunities driven by political sentiment and benefit from the sector’s steady growth in a late economic cycle environment through an investment in XLV.”

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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.