The healthcare sector is considered to be a safe haven in
times of economic uncertainty as its goods and services are in
demand no matter what the broader conditions are. Thanks to this
and some recent positive trends in the space, investors have once
more begun to take another look at this intriguing slice of the
market (
Forget Big Pharma, It Is Time For A Biotech
ETF
).
Still, even though a major point of uncertainty-the Affordable
Care Act-appears to finally be going through-the space is by no
means out of the woods yet. Competition is broadly increasing in
the sector thanks to generics in the pharma space.
Additionally, many companies in the sector are approaching the
end of their patent time periods, putting further pressure on the
long-term growth of the sector. Generic competition and
insufficient new product sales are not the only factors impacting
performance in 2012.
Other headwinds include EU and Japan pricing pressure as well
as negative currency movement. In fact, results of several
companies including Johnson & Johnson (JNJ) were hit by
negative currency movement in the summer quarter.
Meanwhile, the U.S. government is exploring options which will
help increase the availability of generics. The Obama
administration announced that it is looking to implement a
proposal under which the exclusivity period for branded drugs
will be cut down by 5 years, thereby allowing generics to enter
the market sooner. (
Could The Small Cap Healthcare ETF Be A Great
Pick?
).
This has worked well for a few firms, helping them to hold
steady in the current market environment, but it has forced many
to look at M&A activity to boost growth instead. This has
been a boon for small caps as these have become takeover targets
in this environment as large caps grow more desperate to fill up
their pipelines or acquire new technologies.
Given this, a look at a top ranked small cap ETF in the space
could be the way to target the best of the segment with lower
levels of risk (
Top Zacks Ranked Pharma ETF in Focus
)
About the Zacks ETF Rank
This can easily be done by using the Zacks ETF Rank. This
technique provides a recommendation for the ETF in the context of
our outlook of the underlying industry, sector, style box, or
asset class. Our proprietary methodology also takes into account
the risk preferences of investors as well.
The aim of our models is to select the best
ETFs
within each risk category. We assign each ETF one of five ranks
within each risk bucket. Thus, Zacks Rank reflects the expected
return of an ETF relative to other ETFs with similar level of
risk.
Using this strategy, we have found an ETF Ranked 1 or 'Strong
Buy' in the healthcare industry which we have highlighted in
greater detail below:
PowerShares S&P Small Cap Health Care ETF
(
PSCH
)
PSCH tracks the S&P SmallCap 600 Capped Health Care Index.
The Index has been specifically designed to track small companies
which are mainly into providing healthcare-related products,
biotechnology, pharmaceuticals, medical technology, supplies, and
facilities (
Medical Device ETFs: A Better Way To Play Health
Care?
). This produces a product which is home to 66 stocks while
charging investors a somewhat low fee of 29 basis points.
As the name suggests, the fund has a tilt towards small cap
securities thereby assigning more than 55% of the asset base to
it while the rest goes to micro caps which have a share of 45% in
the asset base. A look at the style pattern reveals that the fund
has a preference for growth stock thereby allocating more than
60% of the asset base while value securities have a share of just
14%.
This also implies that the fund prioritises securities on the
basis of earnings growth and tends to have little inclination for
undervalued stocks or stocks which trade below their intrinsic
value.
With that being said, investors should note that the product
is relatively well spread out from an industry perspective
holding relatively equal portions of companies in the medical
equipment, services, pharma, and biotech spaces (read
ETFs That Will Haunt Your Portfolio If You Don't
Buy Them
).
Among individual holdings as well, the fund's allocation does
not appear to be concentrated in the top 10 holdings. In fact,
the fund assigns just 36% of its asset base to the top 10
holdings while the rest is spread out among other companies. Top
individual holdings include Cubist Pharmaceuticals, Align
Technology Inc, and Heamonetics Corp, while these three account
for about 14% of the total
Overall, this fund could be far more volatile than others in
the space while paying less in dividends as well. However, the
growth is hard to deny for the segment and big pharma is likely
to get even more desperate and competitive. As a result,
the risks seem to be worth taking in this ETF and those who are
looking for more exposure to this segment could have a winner on
their hands with this small cap fund.
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JOHNSON & JOHNS (JNJ): Free Stock Analysis
Report
PWRSH-SP SC HCP (PSCH): ETF Research Reports
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