S&P Likes Three Health Care ETFs

Health care is typically viewed as a defensive sector, but the group faces challenges amid a challenging economic environment and growing uncertainty surrounding the impact on the sector from government -imposed reform, according to Standard & Poor's Investment Strategy. The firm has a “marketweight” rating on the S&P 500 health care group, but is more bullish on three ETFs tracking the group. Year-to-date through September 9, 2011, the Healthcare sector, which represents 11.9% of the S&P 500 index, was up 0.8%, vs. a 8.2% decline in the S&P 500, according to an S&P research note. In the past three months, however, correlations have spiked and many health care ETFs have started to move in lockstep with the broader market. The Health Care Select Sector SPDR

, Vanguard Health Care ETF

and iShares Dow Jones Healthcare Index Fund

have offered little divergence from the S&P 500 in the past 90 days. That said, S&P has “overweight” ratings on all three ETFs. With over $4 billion in assets under management, XLV is more than quadruple the size of VHT and more than seven times the size of IYH by assets. XLV's expense ratio also undercuts its rivals (VHT's 0.24% and IYH is 0.47%). XLV holds the fewest stocks at around 50, compared to 123 for IYH and nearly 300 for VHT. Even with the differences in number of constituents, Dow components Johnson & Johnson

, Merck

and Pfizer

figure prominently in all three ETFs. Abbott Labs

and Amgen

are also found in the top-10 holdings of all three ETFs. “Based on S&P's proprietary ETF Ranking Methodology, XLV and VHT both have an overall S&P ETF Ranking of Overweight. XLV has an Overweight ranking for Performance Analytics, Risk Considerations, and Cost Factors, while VHT has a Marketweight for Performance Analytics but Overweight for Risk Considerations and Cost Factors. IYH has an overall S&P ETF Ranking of Marketweight. IYH received an Overweight ranking for Risk Considerations, but a Marketweight ranking based on Performance Analytics and Cost Factors,” S&P analyst Jeffrey Loo said in the note. Year-to-date, each member of the trio was up about 2% compared to a loss of about 7% for the S&P 500 prior to Wednesday.