Biotech On The Edge? Try Better-Performing Healthcare ETFs

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Includes: IHF, IHI, IXJ, XLV
by: Zacks Funds

Issues in winter 2016 are similar to those in summer 2015. Like China, the U.S. biotech space went berserk in the first week of 2016 with the Nasdaq Biotechnology index losing over 8.7%. With this, the sector snapped the winning momentum of the last four years (an average 7% return).

One of the reasons behind the slump was the Chinese stock market rout that stemmed from soft economic data and its ripple effect on other asset classes. Though there is no direct correlation between the Chinese market and the U.S. biotech space, the flight to safety was prevalent in the first week of 2016. Investors fled the high-growth and high-momentum investing areas like biotech and parked their money in the safe-haven assets.

Additionally, a host of early-stage companies chose secondary stock offerings at discounted prices last week. Now, stock prices tend to swing when publicly offered. In fact, fresh issuance dilutes the shares and lowers their value. This is especially true when the stocks are sold at deep discounts to the current market price. As per analysts, Akebia Therapeutics (NASDAQ:AKBA) and Epizyme (NASDAQ:EPZM) priced their stocks at $9 each, down 36.6% and 68.4% respectively from their 52-week highs.

In any case, biotech stocks have long been guilty of overvaluation. Even after the sell-off, the biggest biotech ETF the iShares Nasdaq Biotechnology (NASDAQ:IBB) trades at 22 times P/E (ttm) compared with 17 times P/E of the SPDR S&P 500 ETF (NYSEARCA:SPY). Yes, the sector holds a lot of promise, but occasional risk-off trade sentiments and overvaluations are threats to it.

Though we believe that after such a steep sell-off, biotech stocks will rebound in the coming days, it is wise for value investors to take some rest off biotech stocks and ETFs, and instead turn their attention towards the more stable, diversified but equally promising broader healthcare ETFs.

Inside Broader Healthcare Space

The broader healthcare sector is also full of strength. A whirlwind of mergers and acquisitions, promising industry fundamentals, plenty of drug launches, growing demand in emerging markets, ever-increasing healthcare spending and Obama care play major roles in making it a lucrative bet for the long term. Moreover, healthcare is said to be recession-proof in nature.

As a result, in the recent market rout, the following healthcare stocks were less damaged and lost in the range of 3-5.4% compared with 16.5% losses at the BioShares Biotechnology Clinical Trials ETF (NASDAQ:BBC). Let's take a look at the healthcare ETFs that resisted the recent wild sell-offs to a large extent. Investors should note that most of the following healthcare ETFs hold a Zacks ETF Rank #1 (Strong Buy).

iShares US Healthcare Providers ETF (NYSEARCA:IHF)

This ETF provides exposure to 50 companies that provide health insurance, diagnostics and specialized treatment by tracking the Dow Jones U.S. Select Healthcare Providers Index. About half of the portfolio is dominated by managed care firms while healthcare services and healthcare facilities round off the top three.

The fund has amassed $681.8 million in its asset base while charging 45 bps in annual fees. IHF fell nearly 3.63% in the first week of 2016 and has a Zacks ETF Rank of 1.

iShares Global Healthcare ETF (NYSEARCA:IXJ)

This $1.45-billion global healthcare ETF holds 90 stocks. Pharma, biotech and life sciences have three-fourth of the share while the rest is occupied by healthcare equipment and services. The fund is heavy on the U.S. (65.7%) followed by Switzerland (11%). The product charges 48 bps in annual fees and lost 3.4% in the last five trading sessions (as of January 8, 2016).

Health Care Select Sector SPDR ETF (NYSEARCA:XLV)

The most popular healthcare ETF follows the Health Care Select Sector Index. This large cap centric fund manages about $13.2 billion in its asset base. Expense ratio comes in at 0.14%. In total, the fund holds 58 securities in its basket. Pharma accounts for 38.7% share from a sector look while biotech (24.1%), healthcare providers and services (18.6%), and equipment and supplies (13.9%) make up for a double-digit exposure each. The Zacks Rank #1 fund was off 3.6% in the first week of 2016.

iShares U.S. Medical Devices ETF (NYSEARCA:IHI)

The fund has amassed about $720 million in assets invested in 50 stocks. Healthcare equipment has around 85.8% exposure followed by life sciences (13%). The fund charges 45 bps in fees. The fund lost about 4% in the last five trading sessions (as of January 8, 2016).

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