Equal-Weight Healthcare ETF Could Be Worthy of 2023 Prescription

The healthcare sector, which is the second-largest sector weight in the S&P 500, is doing its job as a defensive group, outperforming the flailing broader market.

Broadly speaking, healthcare stocks didn’t deliver awe-inspiring performances this year, but “less bad” could be a sign the group is poised for better things in 2023, potentially signaling upside for exchange traded funds such as the Invesco S&P 500® Equal Weight Health Care ETF (RYH).

For its part, RYH is performing significantly less poorly than the S&P 500 this year while offering investors reduced annualized volatility relative to the broad market benchmark. With 2023 right around the corner, some analysts are constructive, though reserved, regarding healthcare’s prospects in the new year.

“Fitch Ratings has assigned a neutral sector outlook to the global pharmaceutical (pharma) and biotech industry, reflecting Fitch’s assumption of a supportive operating environment in 2023, despite inflationary pressures and the higher interest rate environment,” according to the ratings agency.

The $981.4 million holds 66 stocks, and while essentially all of those names reside in comparable cap-weighted healthcare ETFs, RYH, as an equal-weight fund, predictably offers a different approach to the sector. That said, biotechnology and pharmaceutical stocks combine for over 28% of RYH’s weight, meaning the outlook for those groups is relevant to investors considering the Invesco ETF.

“Fitch expects demand in the industry to normalise following some dislocation in the industry and fundamentals again driving towards innovative growth underpinning the long-term growth assumptions in the industry, which remains supported by favourable secular trends such as a growing and ageing population, increasing prevalence of chronic diseases, and greater access to healthcare globally,” added the research firm.

Value stocks represent about 29% of RYH’s weight, while growth stocks account for over a quarter of the portfolio. However, that should not be interpreted as RYH lacking growth outlets or avenues to benefit from a potential rebound in growth stocks. The fund devotes almost 47% of its portfolio to medical device and related companies and life sciences firms. Those are among the growthier corners of the healthcare sector, and those are larger allocations to those groups than are found in most cap-weighted competitors.

“However, the new innovation will be subject to increasing focus on treatment access, including a focus on drug pricing, as healthcare systems are aiming to increase patient value and outcomes in light of structurally growing volumes and limited healthcare resources,” concluded Fitch.

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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.