Make A House Call With A Familiar Healthcare ETF

In what is a stunning reversal to a long-standing bullish trend, the Health Care SPDR (ETF) XLV is the worst performer of the nine established sector SPDR exchange-traded funds this year, with a loss of 4.5 percent.

XLV, the largest healthcare ETF by assets, is off 4.5 percent year-to-date, making it one of just two SPDRs in the red for the year, The Financial Select Sector SPDR Fund XLF is the other. It can be seen as indictment of the healthcare sector that investors have been doing better with less risky, allegedly boring consumer staples and utilities stocks and ETFs.

XLV And Volatility

Even with an allocation to biotechnology stocks that reaches above 20 percent, XLV itself is usually a low volatility offering.

“This fund's historical volatility has been relatively low. Its standard deviation during the past decade was 13.9 percent, which is more than a full percentage point less than the 15.1 percent posted by the S&P 500,” said Morningstar in a recent note.

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Biotechs And Biotech ETFs

Diversified healthcare ETFs, such as XLV, benefited from surging biotechnology stocks, but have recently succumbed to that industry's doldrums. To be precise, XLV's biotech weight is 22.2 percent and that has been problematic this year, as each of the three largest biotech ETFs are sporting year-to-date losses of more than 20 percent, meaning those ETFs are mired in bear markets.

Some market observers believe healthcare's recent slide is a buying opportunity. Add to that, the political consternation that is widely attributed as one of the primary drags on the sector is seen as overdone.

“Many dynamics are affecting U.S. healthcare firms. Pharmaceutical and device firms continue to merge in an effort to create scale and focus on key strategic areas. Also driving mergers are firms' desires to cut costs, tap growth avenues, deploy previously trapped overseas cash, and reduce acquisitors' tax rates through overseas acquisitions,” added Morningstar. “From an innovation standpoint, drugmakers are focusing most on specialty care. As a result, pharmaceutical and biotech firms are targeting smaller patient populations, particularly in oncology, virology, and immunology. Innovating in areas of previously unmet needs should offer higher odds of approval by U.S. regulators and better pricing power for drug firms.”

Pharmaceuticals firms are XLV's largest industry weight at 38.1 percent with medical device makers commanding an allocation of 15.4 percent. Dow components Johnson & Johnson JNJ, Pfizer Inc. PFE and Merck & Co., Inc. MRK combine for over 23 percent of XLV's weight. The ETF charges 0.14 percent per year, or $14 per $10,000 invested.

Disclosure: Todd Shriber owns shares of JNJ and XLF.

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