Write a Prescription for Equal-Weight Healthcare ETF | ETF Trends

Many sector exchange traded funds that weight components by market capitalization are heavily concentrated in just a few stocks.

Traditional healthcare ETFs aren’t exceptions to that trend. That’s the lay of the land when two stocks – Dow components Johnson & Johnson (NYSE: JNJ) and UnitedHealth (NYSE: UNH) – combine for almost 17% of the S&P 500 Health Care Index.

To be sure, some sectors are even more densely concentrated in a small number of stocks. However, equal-weight sector ETFs help investors reduce single stock risk while gaining some diversification. The Invesco S&P 500 Equal Weight Health Care ETF (RYH) is an idea to consider for healthcare stocks. RYH is CFRA Research’s “Focus ETF” for the month of September.

“According to CFRA, many health care stocks in the S&P 500 Index are attractive, not just the largest ones,” says Todd Rosenbluth, CFRA director of ETF and mutual fund research. “There are 32 Strong Buy or Buy recommendations among the 62 health care index constituents. While we find mega-caps Johnson & Johnson (JNJ) and Pfizer (PFE) undervalued, we also like more moderately sized Cardinal Health (CAH) and Universal Health Services (UHS).”

The $994 million RYH, which turns 15 years old in November, tracks the S&P 500® Equal Weight Health Care Index. The aforementioned quartet of stocks are among RYH’s 66 holdings. None of those components exceed weights of 1.89%, confirming that the ETF is a diverse approach to healthcare investing.

RYH has other benefits. Due to its equal-weight methodology, it’s not dominated by the same industry groups as a cap-weighted counterpart.

“While biotechnology, health care equipment, and pharmaceuticals companies dominate the market-cap weighted S&P 500 Health Care sector and comprise 53% of the weighting, other sub-industries have performed better in 2021,” adds Rosenbluth. “Indeed, health care facilities (up 45%), health care supplies (34%), and life sciences tools & services (29%) sub-industries climbed higher than biotechnology (14%), health care equipment (19%), and pharmaceuticals (16%) year-to-date through August 27.”

Another interesting element regarding RYH is that it refutes one of the primary arguments against equal-weight funds. That being an overweight to value stocks drives returns. Indeed, roughly a third of RYH’s holdings are classified as value stocks, but that’s only marginally higher than the fund’s allocation to growth stocks.

As Rosenbluth notes, RYH is beating the cap-weighted S&P 500 Health Care Index this year, and if a standard equal-weight argument is applied here, it’s likely the size factor because about 44% of RYH’s holdings aren’t large caps.

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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.