The Health Care Select Sector SPDR ETF (NYSEArca: XLV), the largest exchange traded fund (ETF) dedicated to the sector, is up 7.09% this year and trailing the S&P 500, but the healthcare sector could be poised for bigger things in the second half of 2019.
Among other factors, XLV and friends have been dogged this year by speculation that Medicare For All could become a reality if Democrats win the White House in 2020. Many of the most visible Democratic contenders for that party’s 2020 presidential nomination are embracing Medicare For All. However, XLV’s recent price action suggests the benchmark healthcare ETF is shaking out of its slumber.
Recently, increased political chatter regarding plans to cap drug prices has weighed on XLV because the fund is heavily allocated to pharmaceuticals makers.
“A closer look shows that the large drugmakers are holding back the health care sector,” reports Investor’s Business Daily. “Of the 10 worst-performing stocks in the sector and the XLV ETF, seven are diversified pharmaceutical firms or biotechs. These stocks tend to suffer during years of heavy political activity. Already, several Democratic candidates have put drug prices at the forefront of their campaigns.”
Big pharmaceutical companies were on the hot seat at Capitol Hill earlier this year with CVS Health, Cigna, Prime Therapeutics, Humana, and UnitedHealthcare’s OptumRx testifying before the Senate Finance Committee on the rising cost of prescription drugs. Among the topics discussed included rebates paid by drug makers contributing to the high costs and the drug industry’s pursuit of profits–all to shift the blame from the pharmaceutical companies to the drug makers.
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.
“Johnson & Johnson stock, XLV’s top holding, is up about 5% so far in 2019, but tumbled more than 4% last Thursday on reports of a possible J&J criminal probe over whether the diversified medical giant lied about cancer risks in its talc powders,” according to IBD. “J&J stock plunged 12% in December on a media report that the company knew about talc powder risks for many years.”
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