The SPDR Health Care ETF (XLV), the largest healthcare ETF by assets, and rival healthcare have been laggards this year, but XLV is higher by about 7% over the past month, pushing its year-to-date gain to nearly 10%. Plus, some market observers believe the S&P 500’s second-largest sector allocation currently offers a value proposition.
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.
“Health Care has been the worst-performing sector in 2019, as regulatory pressures related to drug pricing, insurance, and the opioid crisis have increased as the election draws nearer,” said State Street in a recent note. “This has weighed down the sector’s valuations to the lowest level since 2016 and made it the least expensive sector in the S&P 500 Index.”
Healthcare’s Getting Healthy
One reason to consider XLV, which is heavy on politically sensitive biotech and pharmaceutical stocks, is that much of the political risk weighing on the healthcare sector this year may already be baked into the group.
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.
“Despite these issues, the sector has delivered strong growth and beaten analyst expectations by a large margin during the first two quarters of 2019,” according to State Street. “That’s expected to continue, with Health Care predicted to post positive growth for the rest of 2019. On the other hand, earnings growth in the broader market has turned negative, with continuous downward revision amid global trade uncertainty and economic slowdown.”
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Investors have recently shown some enthusiasm for XLV, adding $442.41 million to the healthcare ETF since the start of the fourth quarter.
“Thanks to its noncyclical business, Health Care historically outperformed the broader market in six of seven US recessions by an average of 10% and in eight of 11 slowdowns by an average of 5% on a cumulative basis since 1960,” notes State Street.
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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.