Earnings Season Is The Right Prescription For Health Care ETFs

The second quarter earnings season has generally been regarded as better than average, with 446 of the 500 companies within the S&P 500 Index having reported thus far.  According to recent Fact Set research data, 73 percent have reported earnings above mean estimates and on average companies are beating expectations by 4.2 percent. 

However, one sector in particular has bounded ahead of its peers and related ETFs are cashing in.  Health care companies have been one of the shining stars of the market this year and continue to show impressive relative strength.   

According to data compiled by Bloomberg, “Ninety percent of health-care companies have exceeded analysts’ profit forecasts so far this reporting period, while 88 percent reported revenue that beat estimates.”

That fundamental strength has been a catalyst for investors to pile into funds such as the Health Care Select Sector SPDR (XLV).  Through August 12, XLV has garnered over $1 billion in net inflows as a result of confidence in further profit potential.

This health care benchmark tracks 55 large-cap companies engaged in pharmaceuticals, biotechnology, and medical services.  The largest holdings in XLV include Johnson & Johnson (JNJ) and Pfizer Inc (PFE), which together control more than 20 percent of the assets in this market-cap weighted fund. 

XLV is the dominant ETF in the health care sector with over $10 billion in total assets and charges an expense ratio of 0.16 percent annually.

So far this year, XLV has gained 9.77 percent compared to the 5.61 percent total return of the SPDR S&P 500 ETF (SPY). 

This outperformance may be another reason asset flows have continued to chase into the health care sector.  So far this year, XLV is trailing only theEnergy Select Sector SPDR (XLE) $2.6 billion net inflows in large-cap sector offerings.

The next test for health care will be whether summer volatility will continue to weigh on stocks or if this mini correction has run its course.  A resumption of the uptrend may provide further confirmation for the health care theme.