In the days leading up to last week's presidential election,
much attention was paid to health care
ETFs
. The theory being that those ETFs tracking hospital stocks and
pharmaceuticals makers would keep thriving if President Obama won
reelection. The President did win, but with the market plunging
over the past week, it feels like even the
the ETFs that should have benefited the most
are not doing much of anything.
The broader market's recent pullback may have created a buying
opportunity in select health care ETFs that some investors have
been waiting for. Along those lines, S&P Capital IQ has
raised its rating on the sector to Overweight from Marketweight.
The firm has also placed Overweight ratings on six health care
ETFs.
"Sam Stovall, S&P Capital IQ's Chief Equity Strategist,
noted that the health care group is trading at a 17% discount to
its median relative P/E ratio since 1995, and that six of its 10
sub-industries are projected to post above-market EPS growth in
2013," the firm said in a research note.
Several of the ETFs to garner Overweight ratings from S&P
Capital include funds that are heavy on blue-chip pharmaceuticals
names such as the Health Care Select Sector SPDR (NYSE:
XLV
). XLV, has an expense ratio of 0.18 percent and assets under
management of nearly $5.5 billion, making it the least expensive
and largest health care ETF. The rival Vanguard Health Care ETF
(NYSE:
VHT
) is also rated Overweight by S&P Capital IQ.
Both funds are heavily allocated to familiar pharmaceuticals
names such as Johnson & Johnson (NYSE:
JNJ
), Pfizer (NYSE:
PFE
), Merck (NYSE:
MRK
) and Abbott Labs (NYSE:
ABT
). However, both have been punished in recent weeks. XLV is off
5.5 percent in the past month while VHT is down more than six
percent over the same time.
Regarding the pharmaceuticals group, "S&P Capital IQ sees
both sales and EPS gains in 2013 within several of the large-cap
names after expected declines in 2012. Although patent expiration
will likely adversely impact this sub-industry over the next
several years, Loo notes that several major drugs, such as
Lipitor, that went off-patent have anniversaried, making
comparable sales and EPS easier in 2013," the firm said in the
note.
The SPDR S&P Pharmaceuticals ETF (NYSE:
XPH
), which is not as heavily concentrated on the largest drug
makers, has plunged 11.2 percent in the past month and is trading
at its lowest levels since June. XPH was also rated Overweight by
S&P Capital IQ.
Regarding exposure to managed care providers, which have also
been under some pressure lately, S&P sees some opportunities
with this sub-sector as well.
S&P analyst Jeff Loo believes the battle moves from
Republicans attempting to repeal the law to some Republicans
resisting the implementation of certain parts of the law, mainly
the creation of state healthcare exchanges and the expansion of
Medicaid. Loo thinks these issues have resulted in some short
term downward pressure on some healthcare sub-industries,
particularly the managed care sub-industry, according to the
note.
"However, he believes the vast majority of states will
eventually participate in the expansion of Medicaid, as the law
offers the states very generous terms. S&P Capital IQ see
this as benefiting the managed care sub-industry. Separately, Loo
and team also view positively this group's efforts to diversify
internationally as well."
The ETF play on the managed care sub-sector could be the
iShares Dow Jones U.S. Healthcare Providers Index Fund (NYSE:
IHF
), which S&P rates Overweight. Dow component UnitedHealth
(NYSE:
UNH
) and Express Scripts (NASDAQ:
ESRX
) combine for nearly 26 percent of IHF's weight. Other top
holdings include WellPoint (
WLP
), Aetna (NYSE:
AET
) and Humana (NYSE:
HUM
).
S&P also placed overweight ratings on the iShares Dow
Jones U.S. Healthcare Sector Index Fund (NYSE:
IYH
) and the iShares S&P Global Healthcare Sector Index Fund
(NYSE:
IXJ
).
For more on health care ETFs, click
here
.
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