Healthcare ETF Survey: U.S. Edges Global Alternatives

Includes: IHI, IXJ, IYH
by: Don Dion

Healthcare was one of the best performing sectors in January and continues to look strong in both long term and short term momentum. Among the many healthcare ETFs, investors should consider iShares Dow Jones U.S. Healthcare Sector Index Fund (NYSEARCA:IYH) as their best option, with iShares Dow Jones U.S. Medical Devices (NYSEARCA:IHI) second.

In the month of January, IYH outperformed the market, losing only 0.7% while the S&P 500 declined by 3.6%. The second best performing healthcare ETF was IHI, which only lost about 1.3% on the month. Interestingly, IHI and IYH are U.S. focused healthcare ETFs and global healthcare ETFs did not fare as well in January as the domestics.

iShares S&P Global Healthcare Sector Index Fund (NYSEARCA:IXJ) lost 2.1% while WisdomTree International Health Care Sector Fund (DBR) declined 3.1%.

IXJ, the smallest loser amongst the international healthcare ETFs, allocates 61.4% of its holdings to the U.S. while DBR allocates none, providing further evidence of U.S. outperformance.

DBR and IXJ are heavy in European countries such as Switzerland, Germany, and France. Europe is facing difficult times going forward as concerns about debt in Greece and other EU countries will continue to weigh down markets on the continent, in addition to weakening the currency versus the U.S. dollar. Since healthcare is traditionally considered a safe-haven sector in times of market uncertainty, it would be prudent of investors in the sector to not expose themselves to the risks emanating from Europe at present.

Therefore, U.S. markets and healthcare companies will continue to outperform their international peers. Investors should go with IYH as a play on the sector’s continued relatively strong performance and improved momentum.

Finally, IHI is also a U.S. healthcare play that would be preferable to DBR, IRY, or IXJ, but it can be more volatile than IYH. IHI leads IYH in short-term momentum indicators but IYH is stronger in long-term momentum. Depending on tolerance to volatility, investors can decide between IHI and IYH.

Disclosure: Long IHI