A Positive Prognosis For Health Care ETFs

Health care, the second-largest sector weight in the S&P 500 behind technology, was one of just three sectors to post positive returns last year. As measured by the Health Care Select Sector SPDR XLV, the largest exchange traded fund dedicated to health care stocks, the sector is off to an impressive start in 2019; XLV is up nearly 3 percent this year.

What Happened

XLV and rival health care ETFs proved resilient last year as growth and momentum sectors fell out of favor with investors. The fund gained 6.3 percent last year while its technology counterpart lost 1.7 percent. While health care is widely viewed as a defensive sector, its 2019 earnings growth is expected to be solid.

“While analysts have downgraded S&P 500® Index earnings for 2019, earnings growth in the Heath Care sector remains intact on the back of stable demand and strong product pipeline,” said State Street in a note out last Friday.

Why It's Important

XLV targets the Health Care Select Sector Index, providing “exposure to companies in the pharmaceuticals; health care equipment and supplies; health care providers and services; biotechnology; life sciences tools and services; and health care technology industries,” according to the issuer.

Pharmaceuticals and biotechnology stocks combine for about half of XLV's roster. Some comparisons confirm XLV's defensive posture. While the ETF has been slightly more volatile than the S&P 500 over the past three years, XLV was less volatile than its real estate and utilities counterparts over that span. Plus, health care has a consistent stream of potential catalysts, a trait not found across all sectors.

“In 2018, the FDA approved 59 novel drugs, exceeding last year’s record for the second consecutive year,” said State Street. “A record number of FDA novel drug approvals over the past two years is likely to fuel sales for new drugs in coming years. In addition, with an aging population driving demand for more medical services and products, US national health spending is projected to grow at a faster rate than normal GDP growth between 2017 and 2026 and more rapidly than the 2008–2016 period, benefiting the sector on a broad basis.”

What's Next

Identifying what's next for XLV is easy: earnings. Over the next two weeks, about two-thirds of the components in XLV's underlying index report quarterly results. Investors have added $153.42 million to XLV this year.

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