The healthcare sector, the second-largest sector weight in the S&P 500 behind technology, is considered a defensive group, making it particularly relevant for retirees and investors nearing retirement.
That doesn’t mean it’s a boring destination for investors’ capital. After all, the Health Care Select Sector SPDR ETF (NYSEArca: XLV) jumped nearly 5% last month and closed July residing around all-time highs.
Last year, XLV and rival exchange traded funds rallied amid the quest to bring coronavirus vaccines to market, but some of the air came out of that trade earlier this year. However, with the recent emergence of the delta variant, investors are again embracing XLV and healthcare equities.
“With the Delta variant shaking things up, however, the healthcare sector has started gaining momentum, rising 8.5% over the past three months, the best of any sector. The Health Care Select Sector SPDR exchange-traded fund (ticker: XLV) is trading near an all-time high—and don’t be surprised if more highs follow,” reports Ben Levisohn for Barron’s.
The $32.6 billion XLV tracks the Health Care Select Sector Index. The ETF allocates 27.72% of its weight to pharmaceuticals companies, making it an ideal avenue for investors looking to capitalize on coronavirus vaccine advancements and the possible need for booster shots. On that note, Johnson & Johnson (NYSE: JNJ) and Pfizer (NYSE: PFE) are XLV’s largest and third-largest holdings, respectively, combining for almost 14% of the ETF’s weight.
Owing to its defensive and quality traits, healthcare often trades at elevated multiples relative to the broader market. But there’s good news for investors: that’s not the case today.
“Usually, such strong performance will leave stocks looking expensive, but that’s not the case now. The Health Care SPDR trades at 17.45 times 12-month forward earnings, four points lower than the S&P 500’s 21.45 times. The sector could be a growth engine for the market in years to come,” according to Barron’s.
Speaking of quality, many XLV components have fortress balance sheets, strong returns on equity, and the capability to grow dividends and boost buybacks going forward. Regarding dividends, healthcare has been a strong driver of S&P 500 payout growth for years and with XLV yielding just 1.39%, there’s ample room for payout growth going forward.
XLV is also appropriate for retirement investors on the basis of lower volatility. Over the past three year’s the ETF’s annualized volatility is below that of the S&P 500’s and its maximum drawdown over that span is 530 basis points below that of the benchmark equity gauge.
For more on income strategies, visit our Retirement Income Channel.
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.