Health Care ETFs Shaping Up Well For 2018

The health care sector, the third-largest sector weight in the S&P 500, recently pulled back as investors rotated into perceived value destinations. The Health Care Select Sector SPDR XLV, the largest health care exchange traded fund by assets, is flat in the current quarter, but still up nearly 21 percent year-to-date.

For most of 2017, health care has been the second-best sector behind only technology, but it's currently being pushed by financial services and industrials to retain the No. 2 spot. Although health care has modestly retreated in recent weeks, some analysts remain bullish on the sector heading into 2018.

Even so, health care stocks are still up 18.9 percent through Dec. 6, ahead of the 17.4-percent advance in the S&P 500,” CFRA Director of ETF & Mutual Fund Research Todd Rosenbluth said in a Monday note. “CFRA remains overweight on the sector as the year closes and 2018 gets underway. We view the fundamentals as understated, valuation continues to be compelling and the defensive nature will serve as a hedge for market uncertainties that linger.” 

Promising Fundamentals

XLV follows the Health Care Select Sector Index and provides exposure to pharmaceuticals; health care equipment and supplies; health care providers and services; biotechnology; life sciences tools and services; and health care technology industries.

The ETF holds 62 stocks with a weighted average market value of $128.1 billion.

"Starting with the fundamentals, this is a sector that has consistently outperformed expectations in 2017 by a wide margin,” said Rosenbluth. “In each of the three quarters completed in 2017, health care earnings growth was between 400 and 600 basis points better than initial consensus estimates (versus the average beat rate of 350 bps for the S&P 500).”

A Defensive Idea

Health care is viewed as a defensive sector and one that is attractively valued relative to some cyclical groups. That could help the group if investors decide to get defensive in 2018.

“The health care sector has often been the beneficiary of market pauses and down moves during periods of uncertainty this year,” said Rosenbluth. “CFRA is encouraged by the level of clarity that is emerging as 2017 comes to a close and we look to an improved economic environment and strong consumer as key drivers for the market in the year ahead.”

CFRA has Buy or Strong Buy ratings on several of XLV's top 10 holdings, including the biotechnology stocks found among that group.

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