With the Healthcare sector being one of the most defensive
sectors in the U.S. market, it has attracted investors' attention
during this climate of global economic uncertainties. This has
happened despite profitability remaining under pressure for
companies from many corners of the sector, and some policy
uncertainty with regards to the Affordable Care Act.
In fact the
Healthcare Select Sector SPDR (
XLV
)
, an ETF which tracks the performance of all the Healthcare
sector stocks from the S&P 500, is up almost 14.2% year to
date lagging behind only
Financial (
XLF
)
and
Consumer Discretionary (
XLY
)
(see
Three Tech ETFs Rocked by Google's Earnings
Miss
).
Now with the Q3 earnings season behind us, health care has
made a good case for a leadership role in this market, despite
some worries over revenues in the long term. This comes as many
health care firms focus in on a cliff of their own, a patent
cliff, as many of their billion dollar drugs are fast approaching
the end of their protection period and could soon face
competition (read
Complete Your Portfolio with These Three ETFs
).
Still, going forward the space is a potential bright spot 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.
Furthermore, the increase in market size coupled with the
rapid inorganic growth for many companies in the form of mergers
and acquisitions will help form a cordial coalition that would
seek to make up for the decrease in revenue in the recent past,
and address the issue for patent expiry for many of their key
products.
This has probably already begun to take shape as is evident in
the form of increase in revenues from the third quarter revenue
numbers.
The defensive nature of stocks from the sector has also been a
major advantage for them in this current turbulent market
environment, and it has allowed a few firms to hold steady. Given
this, a look at some of the top ranked
ETFs
in the space could be the way to target the best of the segment
with lower levels of risk (see
Target Allocation ETF Investing 101
).
About the Zacks ETF Rank
A look at top ranked Healthcare ETFs can 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, a Zacks Rank reflects the expected return of
an ETF relative to other ETFs with similar level of risk.
Using this strategy, we have found one ETF which is Ranked 1
or 'Strong Buy' with this, model in the Healthcare sector which
we have highlighted in greater detail below:
First Trust Health Care AlphaDEX ETF (
FXH
)
Launched in May of 2007, First Trust Health Care AlphaDEX fund
(FXH) is an exchange traded fund (ETF) designed to provide a
broad exposure to the U.S. equity market with a core focus on the
broader Healthcare sector.
The ETF tracks the StrataQuant Healthcare Index which employs
an AlphaDEX stock selection methodology from the parent Russell
1000 index with a core focus on healthcare stocks. The AlphaDEX
methodology of stock selection takes into account various growth
and value factors in order to filter stocks from the broad
index.
Thanks to this innovative fund management technique, FXH
charges a hefty expense ratio of 70 basis points. However, the
product has amassed an asset base of over $600 million while
daily volume is relatively robust at about 150,000 shares a day
(read
Health Care ETFs in Focus on Obamacare Supreme
Court Decision
).
The ETF lays its bets mostly on the Healthcare service
providers and Biotechnology industry. These two industries within
the broader healthcare sector account for nearly 63% of its total
assets while pharmaceuticals account for almost 12%.
From an individual holdings point of view, FXH has 70
securities in its basket and does well in minimizing
concentration risk by allocating just around 23% of its total
assets in the top 10 companies (see more in the
Zacks ETF Center
).
FXH has returned a solid 18% YTD, outperforming the broad
markets and XLV over the time frame. This can be best explained
by the fact that the healthcare sector, due to its defensive
nature, has provided a safe haven for investors, while the fund's
AlphaDEX methodology has helped to select the best stocks of the
group.
Still on a one year look, the fund is holding up even better
with a gain of over 21% in the trailing 52 week period,
suggesting decent long term performance as well (read
4 International ETFs Yielding more than 5%
).
Over the past three years, the ETF has had low historic
volatility as measured by its annualized standard deviation of
just 18.65%. This is reflected in our outlook for the product as
we maintain a
'Low'
risk outlook along with a
Zacks ETF Rank of 1 or 'Strong Buy'
For this intriguing healthcare ETF.
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FT-HEALTH CARE (FXH): ETF Research Reports
SPDR-HLTH CR (XLV): ETF Research Reports
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