Healthcare is one of the major sectors that showed a remarkable rebound recently after bleeding heavily since the start of the year. Bright prospects of the sector and an overall positive investor sentiment spurred demand for its securities. So, the addition of favorably ranked healthcare mutual funds may lead to healthy returns.
Recent Performance of Healthcare Sector
After witnessing significant sell-offs from the start of 2016, the healthcare sector saw a strong recovery over the past one month. The broader healthcare sector ETF - Health Care Select Sector SPDR ETF (NYSEARCA:XLV) - gained nearly 6.2% over the past one-month period, which has helped it to register a gain of 3.6% in the year-to-date frame. It also returned 4% in the trailing three-month period.
Mutual funds from this sector also witnessed a strong recovery in recent times. According to Morningstar, healthcare mutual funds, which declined 5.2% and 15.5% over the year-to-date and one-year periods, respectively, bounced back to register nearly 5.9% gain over the past one-month frame. This impressive one-month gain helped these funds to return 3.4% in the trailing three-month period.
Encouraging Q2 Expectations
Moreover, the medical sector, which is the broader sector for healthcare, is speculated to witness a better second-quarter earnings season compared with the total S&P 500 members. The sector is expected to deliver 0.5% earnings growth on 7.7% higher revenues in the second quarter. This compares favorably with the projected 4.3% earnings decline on 0.5% lower revenues in the S&P 500 index.
One of the important members from the sector, UnitedHealth Group, Inc. (NYSE:UNH) posted encouraging second-quarter results on Tuesday. It came up with earnings of $1.96 per share, beating the Zacks Consensus Estimate of $1.89 and improving 13% year over year. UnitedHealth also posted 28% year-over-year growth in revenues to $46.5 billion, outperforming the Zacks Consensus Estimate of $45.3 billion. UNH's revenues grew 28% year over year to $46.5 billion and outperformed the Zacks Consensus Estimate of $45.3 billion.
Another Dow component from the sector, Johnson & Johnson (NYSE:JNJ) posted second-quarter earnings of $1.74 per share, beating the Zacks Consensus Estimate of $1.67 per share and increasing 1.8% from the year-ago period. Sales of $18.5 billion also beat the Zacks Consensus Estimate of $17.9 billion and increased 3.9% from the year-ago quarter. J&J now expects 2016 earnings in the range of $6.63 to $6.73 per share on revenues of $71.5 billion to $72.2 billion. The company had earlier guided earnings of $6.53 to $6.68 per share on revenues of $71.2 billion to $71.9 billion.
Bright Prospects for Healthcare Sector
Different factors are expected to help healthcare companies to grow in the near future. A strong gain in member enrollment is likely to boost health insurers that form an important sub-sector. The government business, which includes Medicare and Medicaid, will likely see a surge in enrollment. Moreover, diversification in products, increase in international exposure and effective cost management are likely to boost healthcare companies' growth.
Separately, increasing emphasis on high potential areas, which include gene-based esoteric testing for different diseases, are also poised to help companies that provide laboratory and diagnostic services to witness healthy business growth. Other key areas such as adaptation of tactical approaches to boost sales and marketing excellence, leadership in companion diagnostics, and expansion into adjacent markets are also likely to have a positive impact on the performance of companies in this domain.
4 Healthcare Mutual Funds to Buy
Banking on the recent rebound and bright prospects of the healthcare sector, we have highlighted four related mutual funds that may prove to be profitable at least in the near term. These funds carry either a Zacks Mutual Fund Rank #1 (Strong Buy) or #2 (Buy).
We expect these funds to outperform their peers in the future. Remember, the goal of the Zacks Mutual Fund Rank is to guide investors to identify potential winners and losers. Unlike most of the fund-rating systems, the Zacks Mutual Fund Rank is not just focused on past performance, but also on the likely future success of the fund.
Moreover, these funds have encouraging three-month, three-year and five-year annualized returns. They also have minimum initial investment within $5,000, low expense ratios and no sales load.
Fidelity Select Health Care Services Portfolio (MUTF:FSHCX) invests the majority of its assets in companies that either own or are involved in operating hospital and nursing homes, and are related to the healthcare services sector. FSHCX with a Zacks Mutual Fund Rank #1 has an annual expense ratio of 0.77%, lower than the category average of 1.26%. The fund has three-month, three-year and five-year annualized returns of 3.8%, 15.3% and 13.9%, respectively.
Live Oak Health Sciences Fund (MUTF:LOGSX) invests a large portion of its assets in equity securities of health companies that are involved in the research, development, production or distribution of products or services related to healthcare, medicine, or life sciences. LOGSX with a Zacks Mutual Fund Rank #1 has an annual expense ratio of 1.08%, lower than the category average of 1.26%. The fund has three-month, three-year and five-year annualized returns of 4.6%, 15.5% and 15.3%, respectively.
T. Rowe Price Health Sciences Fund (MUTF:PRHSX) invests a major share of its assets in common stocks of companies whose primary operations are related to health sciences. PRHSX with a Zacks Mutual Fund Rank #2 has an annual expense ratio of 0.76%, lower than the category average of 1.26%. The fund has three-month, three-year and five-year annualized returns of 3.1%, 17.2% and 20.7%, respectively.
Vanguard Health Care Fund Investor (MUTF:VGHCX) invests in common stocks of companies in a variety of segments of the healthcare industry. VGHCX with a Zacks Mutual Fund Rank #2 has an annual expense ratio of 0.36%, lower than the category average of 1.26%. The fund has three-month, three-year and five-year annualized returns of 3.7%, 17.1% and 17.9%, respectively.