The defensive healthcare sector is living up to its billing this year, as the S&P 500 Health Care Index is lower by just 0.72% compared to 15.37% for the S&P 500. That could a sign that if stocks rebound in 2023, healthcare could be a leadership group, potentially paving the way for upside for exchange traded funds such as the IQ Healthy Hearts ETF (HART).
HART, which tracks the IQ Candriam Healthy Hearts Index, could be durable even if a recession comes to pass next year — something many banks and economists expect will occur.
“A U.S. recession would suppress volumes, though the impact should be manageable within the context of ratings. Uninsured volumes should be lower than in prior recessions given the Affordable Care Act. Other offsets may include moderating pressure from temporary labor costs for providers, elevated transportation costs and elevated working capital in response to supply chain constraints,” noted Fitch Ratings.
HART isn’t a dedicated healthcare ETF, but it does allocate almost 70% of its weight to that sector. Although it’s not a healthcare ETF in the most traditional sense of that term, HART offers investors an impressive amount of diversification within that sector, positioning investors to potentially capitalize on multiple trends in the space.
For example, HART’s healthcare holdings run the gamut of blue-chip pharmaceuticals companies, health insurance providers, and medical device manufacturers. Four of HART’s top 10 holdings are members of the Dow Jones Industrial, and three of those are healthcare names — Merck (NYSE:MRK), Johnson & Johnson (NYSE:JNJ), and UnitedHealth Group (NYSE:UNH).
“U.S. healthcare credit profiles in 2023 are expected to be comparable with 2022 but with a potential recession replacing easing supply chain constraints as a headwind. Fitch Ratings anticipates rating actions will continue to be issuer-specific and often driven by capital allocation decisions as opposed to operating fundamentals,” added Fitch.
Broadly speaking, Fitch sees strong operating fundamentals and “sufficient leverage and liquidity headroom” in the healthcare sector. However, HART has other avenues with which to propel a potential rebound in 2023.
Notably, the fund’s non-healthcare allocations include decent exposure to the communication services and technology sectors. For example, Apple (NASDAQ:AAPL) and Google parent Alphabet (NASDAQ:GOOG) are both top 10 holdings in the fund. Translation: HART could benefit from a resurgence in growth stocks, which is possible if the Federal Reserve backs off interest rate increases next year. That’s possible if inflation continues to ease.
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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.