A Healthy Rating On A Big Health Care ETF

The Health Care Select Sector SPDR XLV, the largest exchange traded fund tracking the S&P 500's second-largest sector weight, is up just 5.84 percent, underscoring the point that after an impressive 2018, health care stocks are lagging this year.

While health care has yet to shed its laggard status in 2019, some analysts are bullish on XLV.

What Happened

In a recent research note, AltaVista Research tagged XLV with an Overweight rating, the top rating the research firm assigns to ETFs.

The firm's Overweight rating implies “above average appreciation potential. A rating of OVERWEIGHT is assigned to ETFs with ALTAR Scores in the 4th quintile (ranking higher than 60%-80%) of their category,” said AltaVista. “Typically, funds in this category consist of stocks trading at attractive valuations and/or having above-average fundamentals.”

AltaVista has ratings on each of the 11 sector SPDR ETFs, but rates just two – XLV and the Communication Services Select Sector SPDR XLC – Overweight.

Why It's Important

Analysts remain bullish on the health care sector despite the group's lethargy to start 2019. The consensus rating score on XLV is about 77, which is the equivalent of a Buy rating, according to AltaVista. Buy ratings in the health care space have been on the rise over the past two years, but XLV's ratings score is below where it was four years ago.

XLV allocates almost a third of its weight to pharmaceuticals companies and the fund has been supported this year by the ongoing surge in medical device makers. Medical device manufacturers represents XLV's second-largest industry weight at 24.11 percent.

With an almost 19 percent weight to health care and managed care providers, XLV has been hampered by the Medicare For All debate. UnitedHealth Group Inc. UNH, XLV's third-largest holding at a weight of almost 7 percent, is one of just four Dow stocks in the red on a year-to-date basis. Unfortunately for XLV investors, Pfizer Inc. PFE, XLV's second-largest component, is one of the other three.

What's Next

“Revenue growth estimates for this year are exaggerated by several large acquisitions, with the trade-off being a notable drop in margins resulting from the combinations,” said AltaVista. “Nonetheless with valuations attractive and ROE consistently above 20%, Health Care earns an OVERWEIGHT rating in our value-oriented framework. Sell-side analysts, however, only rank the sector roughly on par with the S&P 500.”

Related Links

A Fast-Growing ETF Sponsor

Inside A Surging EM ETF