Healthcare ETFs Could Be Right Ideas for Turbulent Environment

Broadly speaking, the healthcare sector has been disappointing in 2023, with the market capitalization-weighted version of the S&P 500 Health Care Index lower by more than 4%.

However, other perspectives on the sector are more encouraging, and that might be noteworthy to investors looking for reliability and steadiness in the back half of the year. Enter the Invesco S&P 500® Equal Weight Health Care ETF (RYH), which is higher by 2% year-to-date.

With many market participants enamored by the artificial intelligence (AI) investment and the related mega-cap growth equities, a 2% gain may not catch much attention. On the other hand, investors shouldn’t be hasty in writing off healthcare and RSPH because there are lingering catalysts. Those include the potential for redemption stories, the possibility investors will be required to embrace quality in the second half, and the appealing income prospects offered by the sector.

RSPH Redemption Story Ready to Roll

Amid the sector’s 2023 struggles, it’s easy for investors to forget some of the perks found in healthcare, including macro and sector-specific advantages.

“Nonetheless, the healthcare sector continues to remain relatively immune to several macro challenges, including banking system pressures and rising inflation and interest rates. Innovation within the sector and the defensive nature of healthcare products should support stable demand through economic cycles,” observed Morningstar analyst Damien Conover.

Another reason to consider the healthcare sector is its strong value proposition. On that note, many equal-weight critics assert that the style’s success is often attributable to value or size leanings. However, RSPH allocates just about 27% of its weight to value equities, and just 1.80% of its holdings are small-caps. However, the fund is well-positioned to potentially capitalize on the sector’s currently depressed multiples, which are plentiful.

“We view the healthcare sector as undervalued, trading below our overall estimate of intrinsic value. We see plenty of opportunities in healthcare, especially in biopharma, healthcare providers, healthcare plans, and diagnostics and research,” noted Conover. “The drug manufacturers group holds the most 5-star stocks. Conversely, we see fewer undervalued stocks in the medical distribution industry.”

At the industry level, biopharma and life sciences firms could be drivers of a healthcare resurgence in the second half. That’s relevant to investors mulling RPSH because those are two of the ETF’s largest industry weights.

Then there’s the long-term durability of the equal-weight healthcare ETF. Since inception, the S&P 500® Equal Weight Health Care Index — RSPH’s underlying benchmark — beat the S&P 500 by more than 300 basis points and its cap-weighted equivalent by nearly 200 basis points.

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