The healthcare sector is the third-largest sector weight in the S&P 500, but its performance this year is even meatier than that. Healthcare is the second-best performing group in the U.S. this year, trailing only technology.
With that broad-based strength, it is reasonable to expect an array of health care ETFs are getting in on the fun and that has been the case this year as cap-weighted sector funds, industry ETFs with narrower focuses and strategic beta offerings have all offered investors plenty to cheer about.
In the realm of exchange traded funds, cap-weighted funds, as is the case with other sectors, dominate the healthcare landscape. However, there are multiple, credible smart beta spins that investors can consider, including the First Trust Health Care AlphaDEX Fund (NYSEArca: FXH).
As is the case with First Trust’s other smart beta AlphaDEX ETFs, FXH focuses on “growth factors including three, six and 12-month price appreciation, sales to price and one year sales growth, and, separately, on value factors including book value to price, cash flow to price and return on assets,” according to the issuer.
“FXH holds 77 stocks and as illustrated by the AlphaDEX description, this fund goes about its business in significantly different fashion than traditional, cap-weighted healthcare ETFs. For example, pharmaceuticals and biotechnology stocks usually combine for more than 60% of a traditional healthcare ETF’s roster, but this ETF allocates just over 26% to those two groups,” reports Investor Place.
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.
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Market observers are growing more bullish on the sector as a Republican-led Congress and administration could enact reforms to free cash held overseas for tax reason by large U.S. pharmaceutical companies, which could pave the way for increased acquisitions in the sector. The White House is also looking to help the Food and Drug Administration (FDA) expedite new drug approvals, which could serve as a major catalyst for the biotechnology space.
“FXH allocates a combined 58.3% of its weight to healthcare provider and fast-growing healthcare equipment makers, two of the best-performing industry groups in the broader healthcare sector this year. Obviously, the risk with FXH is that if biotechnology and pharmaceuticals names rally, the ETF can lag its cap-weighted rivals,” notes Investor Place.
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