Is the Healthcare SPDR ETF Finally Breaking a Sweat?

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Includes: AGG, GLD, VWO, XLV
by: Gary Gordon

The major benchmarks for U.S. stock markets (e.g., S&P 500, Nasdaq, etc.) have fallen each week for 4 consecutive weeks. It follows that there are precious few economic segments with rolling 1-month gains.

In fact, there was only 1... health care. The SPDR Select Health Care Fund (NYSEARCA:XLV) rose 1.5% through 7/10/2009.

With tech dropping 5%, consumer discretionary stocks giving up 8%, materials giving back 10% and energy selling off 15%, health care honored its safe haven status. But it did more than that. It also showed its value as a diversifier, boasting one of the lowest correlation coefficients with other popular holdings like Vanguard Emerging Markets (NYSEARCA:VWO), SPDR Gold (NYSEARCA:GLD), iShares Aggregate Bond (NYSEARCA:AGG).

Is the health care sector actually showing promise going forward? Or is it merely the recipient of profit-taking dollars from commodities and emerging markets?

It's hard to say. However, only half of the 10 big economic sector funds finished the 2nd week in July above a 200-day moving average... and SPDR Select Health Care (XLV) was one of them.

Xlv health care etf 2009From a profitability standpoint, health care companies, particularly pharmaceuticals, appear well-positioned to show earnings growth. In fact, while year-over-year earnings for the S&P 500 may be set to fall 35%, health care may not even drop!

So why does enthusiasm remain muted at best... non-existent at worst? Government intervention.

House Democrats recently conveyed what many detractors said that they would. Pay for health care by taxing the wealthiest Americans. The problem? Many Americans that fall into the camp of making more than $250,000 annually are small business owners. Small businesses represent as much as 75% of the employer pool.

With national unemployment headed for 10%+, is it possible to create significant numbers of private sector jobs by taxing wealthy, small business owners? After all, most will (and have) cut human resources costs when forced to offer health benefits ("pay to play") or mandated to fork over still higher personal tax dollars.

As much as President Obama and some Democrats desire a sweeping overhaul akin to universal coverage, the enormity of the current recession presents too many roadblocks. The majority party is well aware that it can only play the "inherited recession" card for so long, as jobs may be more important to the average citizen in the near term than immediate health coverage.

And therein lies some irony. It would appear that health care stocks could be pricing in a much smaller government-run system... rather than universal coverage. And that may give SPDR Select Health Care (XLV) -- an investment comprised of for-profit health care companies -- a fighting chance.

[If you'd like to learn more about ETF investing... then tune into "In the Money With Gary Gordon." You can listen to the show "LIVE", via podcast or on your iPod.]

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