Doctor Says Health Care ETFs Look Healthy

Health care, the S&P 500's third-largest sector allocation, is rebounding nicely after slumping in 2016 when the sector notched its first negative showing on an annual basis. This year, the Health Care Select Sector SPDR XLV is higher by nearly 15 percent.

Although the health care sector has already moved noticeably this year, that is not preventing some analysts from extolling the sector's virtues and offering bullish commentary on the group.

“With reduced overhangs and improving fundamentals, CFRA thinks investors are in need of a check up on the weight of health care equities in their portfolios,” said CFRA Research Director of ETF & Mutual Fund Research Todd Rosenbluth in a note Wednesday. “We upgraded our recommended health care sector exposure to Overweight, from Marketweight. The sector joins industrials and materials as our favored sectors in a well-diversified US equity portfolio.”

Capitol Hill Catalysts

A major issue to consider with health care stocks and ETFs this year has been the Republican effort to repeal the Affordable Care Act, also known as Obamacare. Previous efforts on that front have failed and are unlikely to be renewed unless Senate Republicans can find support from across the aisle.

“CFRA equity analyst Jeff Loo believes the outperformance it attributable to several macro factors as well as operational improvements across various sub-industries,” said Rosenbluth. “He thinks the likelihood of the Republicans' repealing and replacing the Affordable Care Act is slim without Democratic support. Subsequently, any potential bill should not result in nearly as many uninsured people compared to prior Republican proposals.”

Another catalyst for XLV and friends has been speculation that the Trump administration would move to expedite the Food & Drug Administration approval process, however, Trump's rhetoric aimed at high pharmaceuticals prices remains sharp.

“Operationally, CFRA sees improvement in biotechnology and pharmaceutical sub-industries. Year to date through mid-August, there have been 27 new drug approvals by the FDA, as compared with 20 for all of 2016, which should aid future profitability,” said Rosenbluth.

An Alternative

XLV, the largest health care ETF by assets, allocates over 55 percent of its combined weight to pharmaceuticals and biotechnology stocks.

An alternative to XLV is the Guggenheim S&P 500 Equal Weight Health Care ETF RYH. That ETF devotes over 57 percent of its combined weight to high-flying health care equipment makes and health care providers. RYH is up almost 17 percent this year.

CFRA has Overweight ratings on RYH and XLV.

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