Healthcare ETFs Live Up To Their Defensive Reputation

Includes: IYH, VHT, XLV
by: Tom Lydon

Exchange traded funds tracking U.S. healthcare stocks have justified their reputation as defensive sector plays in an uncertain economic environment this year.

Health Care Select Sector SPDR Fund (NYSEARCA:XLV) is up 4.8% year to date, compared with a 4.2% loss for the S&P 500, according to investment researcher Morningstar.

“For investors looking for exposure to the healthcare sector, we view ETFs as an attractive investment option,” says Standard & Poor’s equity analyst Jeffrey Loo.

“Overall, we believe healthcare valuations remain attractive as several sub-industries, such as pharmaceuticals and biotechnology, are trading well below their historical levels,” he wrote in a recent sector report. “We believe balance sheets are solid, with large cash balances driving higher dividend payments and even resulting in Amgen (NASDAQ:AMGN) being the first biotechnology firm to pay a dividend." [ETF Flows Suggest Defensive Sector Rotation]

The healthcare sector represents about 12% of the S&P 500. The industry has been outperforming this year but also presents unique risks.

“Although healthcare is often viewed as a defensive sector, our [market weight] recommendation, amid a challenging economic environment, reflects several factors that could adversely impact the sector, including potentially lower profitability due to costs and taxes associated with healthcare reform, along with various sub-industry specific challenges and issues,” Loo wrote.

“However, we note that the impact from healthcare reform remains uncertain as several key provisions have not yet been implemented,” the analyst added. “Current legal challenges regarding the constitutionality of certain provisions have resulted in split decisions in the federal appellate courts, thereby increasing the likelihood of a Supreme Court hearing, which we anticipate occurring in 2012.”

Healthcare sector ETFs include:

  • Health Care Select Sector SPDR Fund (XLV)
  • iShares Dow Jones US Health Care Sector (NYSEARCA:IYH)
  • Vanguard Health Care (NYSEARCA:VHT)

Health Care Select Sector SPDR Fund


Tisha Guerrero contributed to this article.

Disclosure: None