Where To Be With Health Care ETFs

Using diversified health care exchange-traded funds, the third-largest sector in the S&P 500 has been a disappointment this year. The Health Care Select Sector SPDR XLV is down nearly 1 percent year-to-date.

That doesn't mean the entire sector is swooning. In fact, four of the almost 20 ETFs that hit record highs last Friday were health care funds. Speaking of where to focus in the health care sector, two of those ETFs were medical device funds, including the SPDR S&P Health Care Equipment ETF XHE.

What Happened

The $315.54 million XHE tracks the Health Care Equipment Select Industry Index, giving investors exposure to companies in “the following sub-industries: Health Care Equipment and Health Care Supplies,” according to State Street.

While broader health care ETFs are dithering this year, XHE is surging. The medical device fund is up 15.6 percent year-to-date and has been less volatile than XLV along the way. XHE is an equal-weight fund, meaning it doesn't assign large weights to the biggest medical equipment manufacturers.

Why It's Important

XHE's year-to-date bullishness and that of the broader medical device could be signs health care investors are willing to take on a little more risk in a sector that's usually viewed as defensive. Not only is XHE outperforming broad health care ETFs, the fund is easily topping its dedicated biotechnology and pharmaceuticals counterparts this year.

Medical device stocks are also performing well against some challenging regulatory issues.

“The medical device and pharmaceutical industries saw a significant spike in product recalls during the first quarter of 2018, according to the U.S. Recall Index released by Stericycle Expert Solutions,” reports Medical Design & Outsourcing.

First-quarter medical device recalls were the highest since 2005.

What's Next

Mid-sized and smaller medical devices companies, such as the ones found in XHE, aren't the cheapest health care stocks. XHE sports a price-to-earnings ratio of over 45, underscoring the point that health care names with a growth feel can trade at lofty valuations. The ETF is up nearly 71 percent over the past 24 months, confirming its status as a growth/momentum play.

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