Not surprisingly, the coronavirus pandemic is stoking increases in global healthcare spending. The Invesco DWA Healthcare Momentum Portfolio (NASDAQ: PTH) is among several exchange traded funds levered to that trend.
PTH follows the follows the Dorsey Wright Healthcare Technical Leaders Index.
“The Index is designed to identify companies that are showing relative strength (momentum), and is composed of at least 30 common stocks from the NASDAQ US Benchmark Index. Relative strength is the measurement of a security’s performance in a given universe over time as compared to the performance of all other securities in that universe,” according to Invesco.
Data suggest PTH is a credible idea in 2021.
“In our Q1 2021 forecast round, we raised our global healthcare spending forecast for 2021, as the resurgence in COVID-19 infections triggered additional spending,” notes IHS Markit. “Global healthcare spending in 2021 is now forecast to go up to USD9.23 billion, up from a previous forecast of USD9.14 billion. But risks in the market access space, as measured by our proprietary MARS ratings which are released at the same time as our forecasts, remain elevated due to policy developments and market uncertainties associated with the pandemic.”
Understanding PTH’s Momentum Rationale
Since momentum strategies can overweight riskier stocks, the PTH ETF could underperform during another correction. Since defensive stocks typically do better during volatile conditions, the momentum strategy could load up on conservative picks and miss out on the initial recovery in riskier assets.
Momentum investing is rooted in the notion that securities that are on torrid paces will continue acting that way over the near-term while laggards will continue slumping. Long-term data for the momentum factor are compelling, but the factor can be volatile.
Additionally, momentum investing can target those companies that are exhibiting high levels of growth. The momentum factor selects company stocks that have recently outperformed based on the idea that ‘the trend is your friend’ and that stock market leaders typically continue to outperform. This type of strategy can be an effective way of targeting growth-oriented companies since stocks with positive momentum often continue to generate strong earnings.
PTH has some formidable tailwinds moving into 2021.
“Healthcare and technology led the U.S. stock market in generating earnings and revenue growth in 2020,” according to BlackRock research. “They also stand out in generating high free cash flow yields and return on equity, as the chart shows. The quality characteristics of these two sectors could help provide some resilience against any bumps along the road to the economic restart, in our view. At the same time, they offer long-term growth potential given structural shifts such as digitalization and aging societies.”
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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.