A Scintillating Health Care ETF

One of the best-performing corners of the health care sector this year is the medical device and equipment space, and total returns confirm the sentiment.

The two exchange traded funds dedicated to medical device and equipment manufacturers are up by an average of about 24 percent year-to-date, quadruple the roughly 6-percent gain in the broad Health Care Select Sector SPDR XLV, the largest health care ETF by assets.

What Happened

The SPDR S&P Health Care Equipment ETF XHE is not the biggest of the medical device and equipment ETFs, but it is the top performer this year, up 27.4 percent. If XHE, an equal-weight fund, is able to maintain its advantage over its cap-weighted rival through the end of 2018, that would mark the third time in the past four years it has outperformed its cap-weighted counterpart.

XHE is on a three-year winning streak against diversified health care ETFs like XLV. XHE is benchmarked to the Health Care Equipment Select Industry Index, which is a collection of health care equipment and supplies makers.

Why It's Important

As has been widely documented, small-cap stocks and funds are surging this year, due in part to smaller companies being more dependent on the domestic economy for revenue. That trait has helped small-caps weather tariff and trade war-related storms this year. Drilling down on the success of broad small-cap funds this year indicates health care is an important driver of 2018 small-cap upside.

“Within the small-cap space, we found the health care equipment industry presented an attractive growth opportunity,” State Street said in a recent note. “Since the first quarter of 2017, health care equipment has followed a growth trajectory, posting its fourth consecutive double-digit earnings growth in the first quarter of this year.”

With a weighted average market value of $14.37 billion for its holdings, XHE is, by definition, not a small-cap ETF. The figure is still well below the $122.78-billion weighted average market cap on XLV's components.

What's Next

Neither politics nor election results are the lone determinant of XHE's performance. After all, the fund did deliver some impressive annual performances during the previous administration, but XHE has derived some benefit from the White House's present occupant. 

“Following the passage of the 21st Century Cures Act, the FDA sped up its Premarket Approval process in 2017, approving the second-highest number of innovative medical devices since 2005, providing strong product pipeline support for the industry growth,” said SSgA. “Also, the suspension of a 2.3-percent medical device tax for another two years relieved investor concerns about the industry growth.”

Related Links:

Spicing Up The Infrastructure Trade

A New Spin on ESG ETFs