Compared to other sectors, healthcare was sturdy in 2018 and while the sector looks close to being fairly valued, the group could offer more upside this year. The Health Care Select Sector SPDR ETF (NYSEArca: XLV), the largest healthcare ETF by assets, gained 6.30% last year.
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 is 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.
While the healthcare sector is not necessarily stretched on valuation, stock pickers ought to be selective in the group, which is the second-largest sector weight in the S&P 500.
“Overall, we view the healthcare sector as slightly undervalued. The median stock we cover trades at a 7% discount to our fair value estimate. Not surprisingly, we see comparably few buys in the sector, with only 6% of our coverage rated 5 stars,” said Morningstar in a recent note.
American will still need healthcare services, regardless of how the economy is doing. Investors can also capitalize on this all-weather trait through healthcare-related ETFs, such as XLV, the Vanguard Health Care ETF (NYSEArca: VHT) and the iShares US Healthcare ETF (NYSEArca: IYH).
While considerable political attention is likely to be paid to drug prices, pharmaceuticals stocks could offer some upside. Pharmaceuticals is usually the largest industry in cap-weighted healthcare ETFs, such as XLV and VHT.