The Health Care Select Sector SPDR (NYSEArca: XLV), the largest healthcare ETF, is up nearly 21% year-to-date and some traders are betting on more upside for the healthcare sector, the second-best-performing group in the S&P 500 this year behind technology.
Options market data indicate traders are bullish on XLV.
Tuesday’s “penchant for long calls runs counter to the recent trend seen in XLV’s options pits. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the exchange-traded fund’s (ETF) 10-day put/call volume ratio of 3.10 ranks in the 80th annual percentile. In other words, puts have been bought to open over calls at a faster-than-usual clip,” according to Schaeffer’s Investment Research.
XLV tracks the S&P Health Care Select Sector Index. That is the same index the the Direxion Daily Healthcare Bull 3x Shares (NYSEArca: CURE) attempts to deliver three times the daily returns of, so what is good for XLV is even better for CURE.
Related: Healthcare Sector ETFs Pop on Earnings Support
The pharmaceutical and biotechnology sub-sectors may benefit under a Republican president and Congress as the industries are less at risk of price controls that Democrats vowed to impose. However, investors must consider the potential risks to the sector associated with Republicans’ efforts to undo the Affordable Care Act (ACA), also known as Obamacare.
“Given XLV’s long-term trajectory, though, some of this recent put buying may be a result of those long healthcare guarding paper profits against any potential downside. Year-to-date, the fund has surged nearly 21% — guided higher by its 80-day moving average. Plus, XLV shares topped out at a record high of $83.41 on Sept. 13, and came within three pennies of matching this milestone earlier Tuesday,” according to Schaeffer’s.
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 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
For more information on the healthcare sector, visit our healthcare category.