Small-Cap Health Care ETF Has Been Producing Healthy Returns

The small-cap healthcare segment and sector-related ETFs have been a surprising standout in the markets so far this year.

The Invesco S&P SmallCap Health ETF (NasdaqGM: PSCH) advanced 5.7% year-to-date while the broader S&P 600 Small Cap Index dipped 0.8%, the benchmark S&P 500 rose 4.1% and the S&P 500 Health Care Index gained 2.2%.

Large-cap health-care stocks have come under pressure as investors pared down bets ahead of the 2020 presidential campaign as Democratic candidates called for a government-run health insurance, the Wall Street Journal reports.

Meanwhile, the S&P Small Cap 600 Health-Care Sector has not experienced the same problems, and Nicholas Colas, co-founder of DataTrek Research, argued that this small-cap health segment may continue to outperform.

“Small-cap health care has been the place to be so far in 2020 and will likely remain so,” Colas said in a note. “First, they are less likely to be in the crosshairs of any Presidential political debate. Second, they are more likely to be ‘Growth’ stocks rather than ‘Value.’”

Fast-growing companies have been outperforming their value-styled peers, or companies described as trading at a low multiple of their book value. The growth category has pushed ahead of value through much of the decade-long bull rally, and it continues to hold true in 2020, with the S&P 500 and S&P Small Cap 600 growth indices outshining their value counterparts.

Furthermore, Colas pointed out that small-caps tend to have more room to run or grow, compared to larger companies, especially in areas like like biotechnology and pharmaceuticals where smaller companies can come out with breakout innovative medicines that can generate huge growth. These smaller companies are also potential acquisition targets for larger companies seeking to diversify their product lines.

For example, Merit Medical Systems Inc. shares jumped after Starboard Value LP acquired a stake, stating that the medical-device company’s shares were undervalued. Momenta Pharmaceuticals Inc. rallied 61% after the company outlined guidance for 2020 and gave updates on research.

For more information on the markets, visit our current affairs category.