The Health Care Select Sector SPDR (NYSEArca: XLV), the largest healthcare exchange traded fund by assets, is up nearly 3% over the past month and is closing in on record highs. Some market observers are betting healthcare will reach and exceed those all-time highs.
XLV allocates about two-thirds of its combined weight to pharmaceuticals and biotechnology stocks. There are other catalysts to consider, including that the U.S. economy is moving into the late-cycle phase, overall growth may slow and signs of an economic slowdown could pop up. Consequently, investors may also turn to defensive sectors that are less economically sensitive, such as health care.
“Positives in the sector include attractive valuations, upward earnings revisions, share buybacks, and policy tailwinds, including a more favorable regulatory backdrop (though pressure on drug prices remains an issue for pharmaceutical companies),” reports Daren Fonda for Barron’s.
Industry observers argue that medical technology companies can tap into increased healthcare spending among emerging economies while the U.S. market has matured and could experience slower growth. Looking ahead, in the years through 2024, spending growth is projected to average 5.8% and peak at 6.3% in 2020.
What’s Next For Healthcare ETFs
For healthcare ETFs, the good news is that the U.S. economy moving into the late-cycle phase, overall growth may slow and signs of an economic slowdown could pop up. Consequently, investors may also turn to defensive sectors that are less economically sensitive, such as health care.
“More than 90% of health-care companies exceeded earnings forecasts in the second quarter, beating every other sector. Health-care also jumps out for having the fewest downward revisions in operating margins, RBC notes. In-flows into exchange-traded funds that track defensive sectors have also improved lately, with health-care ETFs leading the pack,” according to Barron’s.
The $17.50 billion XLV tracks the Health Care Select Sector Index and holds 63 stocks.
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