Investors in healthcare should look deeper into sub-sectors: Biotechnology, devices, diagnostics, drugs and tools.
As of Dec. 15 the S&P was up 12.94% but the healthcare sector was the laggard, up only 0.43%. Compare this to the leaders: Consumer Discretionary up 24.34%, Industrials up 21.81% and Materials up 14.9%. Healthcare represents 11.17% of the S&P. But there are many sectors within healthcare that are doing quite well if we look at subcategories that are really "technology" such as medtech and biotech. Many life science stocks have soared in 2010: Alexion (ALXN), Exelixis (EXEL), Illumina (ILMN) and Neogen (NEOG). The broad category labeled healthcare underperformed in 2010. The healthcare component of the S&P overweights large cap drug and biotech stocks like Abbott (ABT), Amgen (AMGN), Merck (MRK) and Pfizer (PFE) that have underperformed other S&P sectors.
Here is a summary of several healthcare ETFs that have outperformed compared to the S&P YTD:
- (IBB) - iShares Nasdaq Biotechnology up 13.3% YTD
- (IXJ) - iShares S&P Healthcare Sector ETF up 0.56% YTD
- Morgan Stanley Healthcare Index - 24 large cap (^RXP) up 5%
- (PJP) - Power Shares Dynamic Pharmaceuticals ETF up 28.29% YTD
- (XBI) - SPDR Biotech ETF up 16.14% YTD
- (XLV) - SPDR Healthcare Select up 2% YTD
- (XPH) - SPDR Pharmaceuticals up 23.92% YTD
All of these subcategories of healthcare including "life sciences" have a broad performance range of 0.56% to 28.3%. So when investors or pundits talk about healthcare stocks you need to look at each ETF or Index with respect to not only the components but a wide range of styles:
- Turnover and trading
- Growth vs. value
- Small cap vs. large cap selection
- Inclusion of device,diagnostic and life science tools stocks
- Volatility and Beta
Earlier this month we reviewed biotech ETFs and large cap drug stocks. Drug stocks are beginning to attract value and dividend seekers and our three picks - Abbott, Bristol Myers (BMY) and Novartis (NVS) - as well as our ETF pick (FBT) are up about 3% in two weeks. Seasonality - through the end of January - is quite favorable for biotech and smaller cap stocks and the trend appears to be on track.
The important point with respect to biotech investing is to be diversified and look for companies and market trends within each subsector. Whether you are a stock picker or ETF player there are more choices than ever under the broad label of "healthcare" or "biotech."
Disclosure: I am long ABT, NVS, FBT, BMY.