Healthcare ETFs, including the benchmark Health Care Select Sector SPDR ETF (NYSEArca: XLV), are proving to be steady plays in the face of the coronavirus crisis, but they’re not perfect, according to some analysts.
The largest healthcare ETF by assets, XLV seeks investment results that correspond generally to the Health Care Select Sector Index. The index includes companies from the following industries: pharmaceuticals; health care equipment & supplies; health care providers & services; biotechnology; life sciences tools & services; and health care technology.
“The US Healthcare sector overall is generally resilient but not immune to the effects of the coronavirus as the pandemic is having operational and financial implications for service providers,” said Fitch Ratings in a recent note. “We maintain a Stable Outlook on the sector as healthcare spending is less economically sensitive than other sectors and expect post-pandemic influence on consumer behavior to be limited; thereby having fewer implications for credit profiles.”
Some Good News
Furthermore, the healthcare sector appears cheap relative to the broader market as this segment has underperformed the run in the S&P 500. Healthcare stocks were among the second weakest performers among the 11 major sectors on the benchmark index. Looking ahead, healthcare companies are projected to generate annual earnings of 9% and revenue growth of 14%, the highest of all sectors in the S&P 500, according to FactSet data.
XLV and friends could also prove durable if the U.S. economy encounters a lengthy recession.
“National healthcare expenditures have grown at a CAGR of 6% since 1990, consistently outpacing GDP,” according to Fitch. “However, healthcare spending tends to slow during and following recessions. Spending grew at a CAGR of 2.8% in 2007–2009 during the period encompassing the last US recession.”
Another reason to consider mature healthcare companies, including those found on XLV’s roster: they have few, if any, unprofitable quarters, and they have a cash hoard on their balance sheets to buffer against economic contractions and rough markets. Additionally, the sector, as expected, offers some coronavirus benefits.
“Demand implications resulting from the coronavirus pandemic vary across the US healthcare sector as do operational and supply-chain issues that could influence the ability to meet demand. Providers of healthcare services will see higher demand disruption, while the effect is relatively low for pharmaceuticals and variable for devices and Medtech companies,” according to Fitch.
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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.
