Time For A Checkup On This Health Care ETF

The Health Care Select Sector SPDR XLV, the largest health care exchange traded fund by assets, is up a piddly 2.58% year to date. Said differently, the SPDR S&P 500 ETF SPY is beating XLV by a margin of about 7-to-1.

Whether it has been the Medicare For All debate or the push for lower drug prices, XLV and rival health care ETFs have been hammered on multiple political fronts this year. With the sector struggling, some analysts are taking action.

CFRA Research lowered its rating on health care, the second-largest sector allocation in the S&P 500, to Marketweight from Overweight earlier this week.

Why It's Important

“Sam Stovall, Chief Investment Strategist at CFRA explained that besides already trading at an elevated valuation, particularly for the best performing sub-industries, such as medical technology and life sciences & tools, the group will have to contend with increasing political/regulatory risks as the presidential election cycle gets into full swing,” said CFRA Director of ETF & Mutual Fund Research Todd Rosenbluth in a note out Thursday.

The $16.43 billion XLV allocates 26.13% of its weight to medical device makers and 7.41% to life sciences and tools companies. Those are among the industries that have steadied XLV, somewhat, this year at a time of lethargy for pharmaceuticals and biotechnology stocks.

Another problem facing the health care sector is negative earnings revision. As of Sept. 27, 74 S&P 500 components had guided lower on third-quarter earnings with about one in five of those names hailing from healthcare.

What's Next

Making matters worse for the group is lack of analyst enthusiasm. For example, as Rosenbluth notes, CFRA rates 95 health care stocks, but just 27% have Buy or Strong Buy recommendations at the moment.

“In contrast, there are 13 stocks with CFRA Sell or Strong Sell recommendations,” he said.

Of the 11 S&P 500 sectors, CFRA has Marketweight ratings on seven, including health care.

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