The SPDR Health Care ETF (XLV), the largest healthcare ETF by assets, has recently traded higher and while the gains are modest, XLV’s recent strength could be a sign it’s time for investors to revisit the S&P 500’s second-largest sector weight.
Among other factors, XLV and friends have been dogged this year by speculation that Medicare For All could become a reality if Democrats win the White House in 2020. Many of the most visible Democratic contenders for that party’s 2020 presidential nomination are embracing Medicare For All. However, XLV’s recent price action suggests the benchmark healthcare ETF is shaking out of its slumber.
“f health care hasn’t been left for dead, it has at least been left behind in 2019. The S&P 500 Health Care Sector index has returned just 8% this year, while the S&P 500 has gained 22%. That makes the sector the second-worst performer this year, besting only the beaten-down energy stocks,” reports Ben Levisohn for Barron’s.
Previously, investors embraced healthcare stocks for the sector’s growth and defensive characteristics, providing investors with yields and valuations that are less stretched than other yield-producing stocks like utilities. Some market observers believe the sector’s selloff is overdone and that healthcare stocks could be poised to bounce back.
Examining XLV
One reason to consider XLV, which is heavy on politically sensitive biotech and pharmaceutical stocks, is that much of the political risk weighing on the healthcare sector this year may already be baked into the group.
“Either way, the political risks to health-care stocks may be fully reflected in the sector’s valuations,” according to Barron’s. “Lori Calvasina, head of U.S. equity strategy at RBC Capital Markets, cut health care to a Neutral weighting in March, citing crowding by fund managers and political risks. Fast-forward seven months, and the S&P 500 Health Care index trades at a substantial discount to the S&P 500.”
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Healthcare was under pressure earlier this year after political risks associated with Medicare for All gained traction. Plus, the sector is now attractively valued.
“Health care isn’t just cheap—it is the second-cheapest S&P sector. At 15.1 times 12-month profit forecasts, it trades at a lower multiple than any other group, except financials. Is the discount big enough to encourage investors to start bargain hunting?” according to Barron’s.
For more information on the healthcare segment, 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.
