by David Fabian | July 24, 2014 10:52 am
As a sector, healthcare stocks have a lot to offer in terms of fundamental and technical data that supports ongoing innovation and profitability. The aging baby boomer population combined with an increased focus on affordable health insurance is continuing to promote a focus on new drugs and medical devices aimed to increase quality of life.
From a performance standpoint, the Health Care SPDR (XLV) has significantly and consistently beaten the SPDR S&P 500 ETF (SPY) over multiple time frames. The accompanying table illustrates the differences in average annual return of both funds over the past one, three and five years.
The current list of health care-related ETFs (excluding leverage) now stands at 25. While XLV works well as a large-cap benchmark for healthcare stocks, there are a number of ETFs that track more acute groups of companies — be it industry groups, smaller companies, international stocks, and so on.
Often times these unique ETFs can produce much superior returns when compared to a plain-vanilla index. Being in the right hot stocks at the right time — such as iShares NASDAQ Biotechnology ETF (IBB) return of 66% in 2013 — can lead to a tremendous advantage in your portfolio.
The following funds represent areas of the healthcare sector that have seen the hottest stocks so far in 2014.
The Market Vectors Pharmaceutical ETF (PPH) is the best performing healthcare ETF with a total return of 18% this year.
PPH invests in the 25 largest and most liquid U.S.-listed pharmaceutical companies based on market cap and trading volume. While 58% of the holdings in PPH are U.S.-based, a healthy exposure to stocks in Switzerland, the U.K. and France has helped propel it past its peers this year. Investors in this ETF have benefited from large jumps in hot stocks Allergan (AGN) and Novo Nordisk (NVO), which have gained 53% and 26% respectively.
The continued development and distribution of new drugs makes the pharmaceutical industry a bright spot among healthcare stocks for the foreseeable future.
PPH charges a net expense ratio of 0.35%, or $3.50 for every $1,000 invested, and has a 30-day SEC yield of 1.8%.
While biotechnology stocks have cooled off significantly from their run last year, one ETF has continued to put up impressive results. The First Trust NYSE Arca Biotechnology Index Fund (FBT) has more than $1.2 billion invested in just 20 biotechnology companies with an equal-weighted portfolio structure.
This concentrated basket of stocks allows for each holding to contribute a proportionate share of the total performance, which thanks to several hot stocks has combined to generate positive returns of 20% this year. The stocks in FBT are rebalanced on a quarterly basis to ensure the weightings remain in line with the index specifications.
This focused exposure also can work against the concept of diversification that ETFs have become so famous for, however. An ETF with fewer holdings can be subject to additional volatility if one stock fails to perform with the group. But for the time being, the FBT portfolio appears to be firing on all cylinders.
PBT charges 0.6% in expenses.
The iShares U.S. Healthcare Providers ETF (IHF) is another leading segment of the healthcare sector this year.
IHF — which tracks 49 healthcare stocks engaged in insurance, diagnostics and specialized treatment — has gained 13% so far in 2014 and just recently hit a new all-time high.
Hot stocks in IHF such as UnitedHealth Group (UNH) and Wellpoint (WLP) have continued to benefit from the halo effect of the Affordable Care Act along with a growing need for medical services here in the U.S.
Historically, this fund has had less volatility than the market as a whole. According to the iShares website, IHF has a beta to the S&P 500 Index of just 0.65, which indicates smaller price fluctuations than a broad measure of stocks.
IHF charges a modest 0.43% expense ratio and has more than $500 million in total assets.
David Fabian is Managing Partner and Chief Operations Officer of FMD Capital Management. As of this writing, he did not hold a position in any of the aforementioned securities. To get more investor insights from FMD Capital, visit their blog.
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