The healthcare space has led the broad market for most of the
first half of 2013 and continues its incredible run into the
second half as well (read:
Top ETFs of the First Half of the Year
). In fact, the SPDR Health Care Select Sector Fund (
) is up nearly 24.9% in the year-to-date timeframe compared to
17.0% gains for SPDR S&P 500 (
This is largely thanks to some sector rotation along with
strength in biotechnology and the pharmaceuticals firms.
Investors of late have been moving out of lower risk, high
dividend sectors like utilities and real estate investment
trusts, into higher risk, growth sectors like financials,
consumer discretionary and healthcare.
The healthcare space will likely be a bright spot going
forward as the U.S. is one of the major markets for healthcare
and one of the largest spenders on public health, putting the
sector in an advantageous position.
The sector is poised to benefit from the aging population,
higher rates of chronic disease, growing demand in emerging
markets, product launches and increased mergers &
acquisitions. Further, the sector also looks well positioned to
profit from the imminent Affordable Care Act (also known as
2 Great Healthcare ETFs in Focus
Why Small Caps?
Investors are losing faith in the international economy with
challenges to emerge from recession becoming tougher. Many
emerging markets, including China, are also experiencing
As a result, investors seeking to take real advantage of the
growing healthcare space should focus in on small caps rather
than the large caps. This is because small caps have more
potential to move higher given their true domestic exposure
Time to Focus on Small Cap ETFs?
These pint sized stocks aren't big enough to be international
behemoths, so these focus mostly on the U.S. for their revenues,
thereby promising returns in a global slowdown. Furthermore,
given their small sizes, these have a much easier time growing
than their already tapped out large cap counterparts.
While small caps are often capable of higher levels of growth
than large caps, these can experience levels of volatility as
huge gains and losses can occur in a very short period of time.
In this backdrop, we have highlighted three small cap ETFs that
have generated impressive returns so far this year.
Any of the following three could be rewarding for investors
with a more domestic focus in the second half of the year (see
more in the
SPDR S&P Biotech ETF (
This is by far the most popular choice in the biotech corner
of the healthcare segment. The fund tracks the S&P
Biotechnology Select Industry Index (read:
Biotechnology ETF Investing 101
). The product has $926.9 million in AUM and trades more than a
quarter million in volume a day, while its cost is just 35 basis
points a year.
XBI is an equal weighted ETF, spreading out assets across
roughly 57 firms. No single company accounts for more than 2.93%
of the portfolio. The fund allocates half of the assets in small
cap securities while large cap takes just 14% share.
In terms of performance, the product generated more than 27%
returns year-to-date and 21% in the trailing one-year period.
PowerShares S&P SmallCap Health Care Portfolio (
This ETF tracks the S&P SmallCap 600 Capped Health Care
Index and holds 66 securities in its basket. It is unpopular
having amassed $119.6 million in asset base and trading in volume
of less than 15,000 shares per day, while charging a relatively
low 29 bps a year in fees.
From a securities look, the product is somewhat concentrated
across each security as the top three holdings - Salix
Pharmaceuticals, Cubist Pharmaceuticals and Centene Corp. -
together make up for 14.5% share in the basket. PSCH is a small
cap centric fund accounting for at least 85% of the assets.
Additionally, the fund is relatively well spread out from an
industry perspective holding relatively equal portions of
companies in the medical equipment, services, pharma, and biotech
spaces. The ETF is up about 26.22% so far this year and 22.33% in
the trailing one-year period.
PowerShares Dynamic Biotechnology & Genome Portfolio
This ETF follows the Dynamic Biotechnology & Genome
Intellidex Index. The product has a somewhat sparse volume of
just 18,000 shares a day, but a decent level of assets under
management of about $170 million. The fund charges 63 bps in fees
and expenses from investors.
With holdings of 30 stocks, the fund is moderately
concentrated in the top 10 holdings and focuses more on small
caps with 41% of total assets. Large caps account for 23% while
the rest goes towards mid caps. Waters Corp, Illumina and Life
Technologies occupy the top three spots in the basket with a
combined share of nearly 15%.
In terms of industrial exposure, 61% of assets are allocated
to biotechnology while 29% are alloted pharmaceuticals (read:
3 Impressive Biotech ETFs Crushing the Market
). The product has added an impressive 35% year-to-date and over
30% in the trailing one-year period.
Although the near future of healthcare is uncertain as
Obamacare fully gets underway, the long-term outlook looks
promising. Health care will remain in demand no matter what
happens, especially given the demographic shift in the U.S. and
the insatiable demand for new treatments and drugs for a variety
Thus, these products could be an interesting choice for
investors seeking higher returns from the space.
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PWRSH-DYN BIO (PBE): ETF Research Reports
PWRSH-SP SC HCP (PSCH): ETF Research Reports
SPDR-SP BIOTECH (XBI): ETF Research Reports
SPDR-HLTH CR (XLV): ETF Research Reports
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