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The Financial Pulse Of Healthcare ETFs

Summary

Recent equity market volatility is contributing to bottom line changes for Healthcare ETFs.

Several ETFs appear poised to outperform the majority within the sector.

Interpret recent performance changes to better prepare for executing optimal healthcare investment decisions.

After the second pullback within the past two months, it may be time to change your healthcare sector ETF investment allocations.

In early February US stocks endured the steepest price drop since 2012. The S&P 500 fell ~9.5% from February 1st to February 9th. From its low on the 9th, the market managed to rebound ~7.5% and fluctuate around that level until a similar downtrend occurred again dropping ~8.5% from March 13th to April 2nd. Considering the recent FED interest rate increase and announcement of 3 more hikes over the next year as well as the overall equities market direction in a critical state of uncertainty, the time has come to reevaluate equity holdings to better prepare for the coming months.

By analyzing the performance of healthcare sector ETFs based on volume, performance over the past year, performance year to date (YTD), and performance over the past month, investors can gain a better understanding of how execute positive financial results over the next few months and beyond.

Current Highest Average Volume Healthcare ETFs

    1. Health Care Select Sector SPDR Fund ( XLV ) : Avg. Volume = 10,310,485
    2. SPDR S&P Biotech ETF ( XBI ) : Avg. Volume = 4,999,583
    3. iShares Nasdaq Biotechnology ETF ( IBB ) : Avg. Volume = 3,113,894

These ETFs are amongst the most popular options for gaining exposure to the U.S. health care sector, and as such might be an attractive option for investors looking to tilt exposure towards lower risk industries.

XLV tracks the healthcare stocks in the S&P 500, weighted by market cap. It is the oldest fund in this segment and by far the largest. As a reflection of the U.S. healthcare market, this fund has generally performed well. It stands head and shoulders above its peers by nearly every metric – including liquidity and holding costs. XLV is among the cheapest ways to gain access to health care companies, and offers impressive depth of holdings as well. 

XBI offers exposure to a subsection of the healthcare market that has historically performed well within periods of consolidation (one-year, three-year and five-year annualized returns: 43.77%, 11.35% and 24.33%, respectively) and is capable of big jumps in the event of major drug approvals. This ETF can be useful for those seeking to fine tune exposure or for those bullish on the sector over the long run. XBI focuses exclusively on American stocks, and primarily consists of mid cap and small cap securities. XBI's portfolio is somewhat limited, though the equal-weighted methodology of the underlying index ensures that assets are balanced across all components. That feature can be particularly important in the biotech space, where specific companies are capable of turning in big gains over short periods of time. If XBI interest you, look at its depth of exposure and weighing methodology, as these factors can have a major impact on the risk and return profiles achieved.

IBB is another ETF that offers exposure to the biotech sub-sector of the health care industry, serving up access to a group of stocks that can thrive on technological breakthroughs and increased investment in medical processes. IBB is primarily focused on U.S. stocks, though a smattering of international firms adds some degree of international diversification. This biotech ETF considerably larger basket of holdings compared to other ETF options for exposure into the niche, investing in more than 100 stocks. That feature can be particularly important in the biotech space, where company-specific developments can send a single stock soaring. IBB is somewhat top-heavy, but generally spreads exposure across large caps, mid caps, and small cap stocks. PBE and FBT are other ETF options for biotech exposure; those considering this sector should take a close look at depth of exposure and weighing methodology, as these factors can have a major impact on the risk and return profiles achieved. The expense differentials are also worth noting; IBB is the most attractive in this respect.

Healthcare ETFs with Best Positive Increases Over the Past Year

    1. Direxion Daily S&P Biotech Bull 3x Shares ( LABU ) : ( +69.36% )

LABU reflects the performance of the S&P Biotech Bull fund performance multiplied by 3 so it represents a magnified look at how robust S&P biotech collection has been over the past year.

    2. PowerShares S&P SmallCap Health Care Portfolio ( PSCH ) : ( +43.06% )

PSCH offers exposure to the value and growth characteristics of small cap health care sector companies. Securities in this corner of the market can be also be prone to quick shifts in sentiment thanks to changing government regulations or policies. Furthermore, many companies in this corner of the market are unprofitable and rely on FDA drug approval in order to snap back into the green, a very risky proposition. With that being said, PSCH gives investors a nice mix of biotech, pharma, medical tech, and facility companies spreading risk around the various corners of the health care world. However, it should be noted that the fund does still have significant concentration in its top ten holdings as these companies make up close to one third of total assets, rather high considering the fund only has 70 securities in total. As a result, investors should consider this fund only if they are looking to tactically tilt towards the sector or round out exposure to the health care segment.

    3. PowerShares DWA Healthcare Momentum Portfolio ( PTH ) : ( +42.30% )

PTH is a component of the suite of "dynamic" ETF products from PowerShares, seeking to replicate a benchmark that is constructed based on a proprietary screening methodology. While PTH is an index-based fund, the underlying index seeks to generate alpha by using quant-based filters to select individual stocks. For those who believe the methodology employed is capable of generating alpha over the long run, PTH might be an attractive way to access health care stocks. For those who believe in efficient markets and are looking to keep expenses down, there are probably better options out there; PTH is considerably more expensive than other options such as XLV and FHC. As a sector-specific fund, PTH is probably too targeted for inclusion in a long-term portfolio; this ETF will be more useful for establishing a short-term tactical tilt or as part of a sector rotation strategy.

Healthcare ETFs with the Best Positive Increases Year to Date (YTD)

    1. Loncar Cancer Immunotherapy ETF ( CNCR ) : ( +19.85% )

The index is composed of the common stock of approximately 30 pharmaceutical or biotechnology companies identified by the fund's index provider, as having a high strategic focus on the development of drugs that harness the body's own immune system to fight cancer. The adviser attempts to invest all, or substantially all, of its assets in the component securities and ADRs that make up the index. Normally it will invest at least 80% of its total assets in the component securities of the index. The fund is non-diversified.

    2. PowerShares S&P SmallCap Health Care Portfolio ( PSCH ) : ( +13.98% )

(See section above)

    3. Virtus LifeSci Biotech Clinical Trials ETF ( BBC ) : ( +11.04% )

The Fund seeks investment results that correspond to the performance of the BioShares Biotechnology Clinical Trials Index. Clinical Trials stage companies are typically younger, smaller companies which do not have a drug approved, but instead focus on testing their experimental drugs.

Healthcare ETFS with the Best Price Changes Over the Past Month

Of 39 healthcare ETFs analyzed when researching this article’s statistics, not a single ETF had a positive increase from 1 month ago to now.

PSCH deserve the most of healthcare ETF investor interest going forward considering how well it has performed over the past year, YTD, and last month relative to other healthcare ETFs. PSCH has managed to minimize its one month loss best amongst healthcare ETFs.

    1. PowerShares S&P SmallCap Health Care Portfolio ( PSCH ) : ( -0.12% )

PSCH may deserve the most of healthcare ETF investor interest going forward considering how well it has performed over the past year, YTD, and last month relative to other healthcare ETFs. PSCH has managed to minimize its one month loss best amongst healthcare ETFs.

    2. SPDR S&P Health Care Equipment ETF ( XHE ) : ( -0.25% )

offers targeted exposure to the health care equipment space, a targeted sector of the health care industry that includes manufacturers of various equipment and supplies. Given this narrow focus, XHE likely isn't appropriate for investors building a long-term, buy-and-hold portfolio; this ETF will appeal to those looking to implement a tactical tilt towards a very specific corner of the U.S. markets. The equal-weighted nature of the underlying index is appealing for the balance of holdings, as no one name accounts for a meaningful portion of total assets. Investors seeking more broad-based health care exposure may prefer XLV, while those looking to go international have options such as IRY available to them.

    3. iShares U.S. Medical Devices ETF ( IHI ) : ( -1.75% )

IHI focuses in on an interesting and often forgotten segment of the health care industry, the medical device makers. Medical device companies within this segment tend to have more stable revenue streams, less issues with patent pipelines, and are often much smaller than their counterparts in big pharma. As a result of their size, many of the companies in IHI are found in very small quantities in large diversified health care ETFs such as XLV making IHI an interesting play to 'complete' exposure to the industry. However, while the industry may not have the same patent issues as pharma or the volatility of the biotech industry, it does have incredibly high levels of competition. This is because any commodity type products are easy to replicate while any patented products are often not crucial to a hospital and instead just make life a lot easier or more efficient for medical personnel, making these goods more 'luxury' in nature. Overall, IHI offers a nice mix of exposure in the industry and could be an excellent choice for investors who already are heavy in holdings to the pharma or broad health care industry but are still looking to round out overall exposure.

Conclusion

In summary, over the past year many healthcare companies and ETFs have benefitted from the corporate tax cuts, easing of the trial regulations, rising bull market investor confidence, lower interest rates, and a variety of conditions that may have expired or have less of an impact going forward when considering the equities market dip over the past 2 months. Note that while particular noteworthy yearly price changes may stand out and garner attention, look more closely into the equity history to a time frame that reflects the recent interest rate shifts, the market dip following the crypto bubble bursting, and the dip that has happened the past few week and those factors may trigger a strong overall market in the near future.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.