The Health Care Select Sector SPDR (NYSEArca: XLV), the largest healthcare exchange traded fund, is up nearly 3% over the past week as the second-best-performing sector in the S&P 500 this year continues trending higher. Some analysts believe the healthcare sector will continue its bullish tendencies for the remainder of 2017.
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.
“The healthcare sector showed huge fluctuations in 1H17. The failure of the healthcare restructuring bill in Congress played an important role in the sector’s movement. On the other hand, the stronger earnings growth of various healthcare stocks supported the movement of this sector,” according to Market Realist. “If the healthcare restructuring bill passes in Congress, then we could see more upside in this sector. The healthcare sector is considered a defensive sector. The defensive sector has little correlation with the business cycle, so it is also known as a non-cyclical sector. Investors generally invest in the defensive sector to protect their investments from the business cycle ups and downs.”
Rivals to XLV include the iShares U.S. Healthcare ETF (NYSEArca: IYH). The $1.9 billion IYH holds nearly 120 stocks and tracks the Dow Jones U.S. Health Care Index. The ETF devotes almost 34% of its weight to pharmaceuticals stocks and another 23% to biotechnology names. Healthcare equipment names, one of the best-performing healthcare industry groups this year, are almost 19% of the fund’s weight.
The pharmaceutical and biotechnology sub-sectors may benefit under a Republican president and Congress as the industries are less at risk of price controls that Democrats vowed to impose. However, investors must consider the potential risks to the sector associated with Republicans’ efforts to undo the Affordable Care Act (ACA), also known as Obamacare.
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 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
For more information on the healthcare sector, visit our healthcare category.
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.