Today the world woke up to the reality of a US federal
government shutdown due to an inability to negotiate a new budget,
but one facet of the economy that seems to be churning forward is
health care. Today marks the first open day of the much anticipated
health care exchanges that were created as a result of the
Affordable Care Act. They were formed with the notion of giving all
Americans the ability to purchase affordable health care coverage
for themselves and their family.
There are more than likely going to be a few kinks to work out of
the system in the coming months as the new laws and exchanges are
implemented. However, with the health care industry on the cusp of
fundamental change, I thought it prudent to check in on the trend
of related ETFs that may be impacted (either positively or
negatively) by this transition.
The largest health care related exchange-traded fund is the
HealthCare Select Sector SPDR
(NYSEARCA:XLV) which holds 57 unique large-cap companies engaged in
pharmaceuticals, biotechnology, and medical equipment services. XLV
currently controls over $7.5 billion in total assets and charges an
annual expense ratio of just 0.18%. The top-three holdings include
Johnson and Johnson
Merk & Co.
As you can see by the price trend in the chart above, XLV has been
a dominant force in 2013 with gains of nearly 30% this year. If you
think that's impressive, consider that the
iShares NASDAQ Biotech ETF
) has gained more than 46% over the last 52 weeks. It's plain to
see that investors have been flocking to not only traditional
dividend-minded plays in the health care space, but also seeking
out innovative growth strategies in the form of biotechnology
stocks. According to
, XLV and IBB have attracted a combined $1 billion in new assets
since the beginning of the year.
Another added benefit of the health care stocks is that they are
considered defensive in nature because their business models are
non-cyclical. Pfizer alone is hoarding billions of dollars of cash
on its balance sheet and continuing to store money for a rainy day.
This cash could eventually be used for additional dividends to
shareholders, share buybacks, new business acquisitions, or
development of innovative products -- all of which may ultimately
boost investor demand and the price of the company's stock.
The future of the health care sector looks bright as an aging baby
boomer population will require continued advances in medical
technology and rising health care costs boost profits for
pharmaceutical and service companies. The addition of the newly
established health care exchanges will likely pump more money into
this sector as insurance and other health care related companies
ramp up their game and adapt to the new regulatory environment.
I am hesitant to recommend a headlong advance into health care ETFs
right now solely because of the stretched nature of the price
trend. Biotech stocks in particular look very strong as IBB makes
new highs today. My suggestion is to wait for a modest pullback
before putting additional money to work in either broad-based
health care ETFs or more aggressive biotech names. If you already
have exposure to these sectors, then by all means continue to ride
the trend and trail your stops higher to lock in gains.
Read more from David Fabian, Managing Partner at FMD Capital
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