S&P Touts ETFs For Rise in Health Insurance Stocks

Don't sleep on the managed health care group. Those stocks were up almost 31% year-to-date through Oct. 31 compared to a mere 6.2% gain for the S&P 500, according to S&P Capital IQ and the reasearch firm is bullish on two ETFs as a way of getting exposure to the managed care group.

“The group has been aided by lower-than-expected medical loss ratios (MLRs), reflecting moderated medical cost trends and favorable prior-period reserve development (PPRD),” S&P analyst Phillip Seligman said in a note.

To take advantage of the bullish sentiment in managed care equities, S&P likes the Health Care Select Sector SPDR (NYSE: XLV) and the Vanguard Health Care Index Fund (NYSE: VHT), both of which the research firm continues to rate “overweight.” S&P Capital IQ previously issued “overweight” ratings on XLV and VHT in mid-September.

Managed health care stocks recently accounted for 9.39% of XLV's holdings and 8.83% of VHT's with UnitedHealth (NYSE: UNH) the only managed care stock in the top ten of both ETFs, but despite this comparatively low exposure, we believe managed health care stocks were likely one of the principal drivers of the ETFs' 12-month returns, Seligman wrote.

Both ETFs also feature some exposure to Aetna (NYSE: AET), Cardinal Health (NYSE: CAH), Humana (NYSE: HUM) and WellPonint (NYSE: WLP).

"XLV and VHT have overweight scores in the Performance Analytics, Risk Considerations and Cost Factors categories, with both in the top quartile of their asset class for S&P STARS and Fair Value and for their low volatility and cost," Seligman said.

With an expense ratio of 0.24%, VHT is home to 293 stocks and $717.9 million in assets under management. XLV has $4 billion in AUM, fees of 0.2% and 50 stocks in its lineup.