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S&P Reiterates Bullish View on Health Care ETFs

S&P Reiterates Bullish View on Health Care ETFs

In the days leading up to last week's presidential election, much attention was paid to health care ETFs. The theory being that those ETFs tracking hospital stocks and pharmaceuticals makers would keep thriving if President Obama won reelection. The President did win, but with the market plunging over the past week, it feels like even the the ETFs that should have benefited the most are not doing much of anything.

The broader market's recent pullback may have created a buying opportunity in select health care ETFs that some investors have been waiting for. Along those lines, S&P Capital IQ has raised its rating on the sector to Overweight from Marketweight. The firm has also placed Overweight ratings on six health care ETFs.

"Sam Stovall, S&P Capital IQ's Chief Equity Strategist, noted that the health care group is trading at a 17% discount to its median relative P/E ratio since 1995, and that six of its 10 sub-industries are projected to post above-market EPS growth in 2013," the firm said in a research note.

Several of the ETFs to garner Overweight ratings from S&P Capital include funds that are heavy on blue-chip pharmaceuticals names such as the Health Care Select Sector SPDR (NYSE: XLV). XLV, has an expense ratio of 0.18 percent and assets under management of nearly $5.5 billion, making it the least expensive and largest health care ETF. The rival Vanguard Health Care ETF (NYSE: VHT) is also rated Overweight by S&P Capital IQ.

Both funds are heavily allocated to familiar pharmaceuticals names such as Johnson & Johnson (NYSE: JNJ), Pfizer (NYSE: PFE), Merck (NYSE: MRK) and Abbott Labs (NYSE: ABT). However, both have been punished in recent weeks. XLV is off 5.5 percent in the past month while VHT is down more than six percent over the same time.

Regarding the pharmaceuticals group, "S&P Capital IQ sees both sales and EPS gains in 2013 within several of the large-cap names after expected declines in 2012. Although patent expiration will likely adversely impact this sub-industry over the next several years, Loo notes that several major drugs, such as Lipitor, that went off-patent have anniversaried, making comparable sales and EPS easier in 2013," the firm said in the note.

The SPDR S&P Pharmaceuticals ETF (NYSE: XPH), which is not as heavily concentrated on the largest drug makers, has plunged 11.2 percent in the past month and is trading at its lowest levels since June. XPH was also rated Overweight by S&P Capital IQ.

Regarding exposure to managed care providers, which have also been under some pressure lately, S&P sees some opportunities with this sub-sector as well.

S&P analyst Jeff Loo believes the battle moves from Republicans attempting to repeal the law to some Republicans resisting the implementation of certain parts of the law, mainly the creation of state healthcare exchanges and the expansion of Medicaid. Loo thinks these issues have resulted in some short term downward pressure on some healthcare sub-industries, particularly the managed care sub-industry, according to the note.

"However, he believes the vast majority of states will eventually participate in the expansion of Medicaid, as the law offers the states very generous terms. S&P Capital IQ see this as benefiting the managed care sub-industry. Separately, Loo and team also view positively this group's efforts to diversify internationally as well."

The ETF play on the managed care sub-sector could be the iShares Dow Jones U.S. Healthcare Providers Index Fund (NYSE: IHF), which S&P rates Overweight. Dow component UnitedHealth (NYSE: UNH) and Express Scripts (NASDAQ: ESRX) combine for nearly 26 percent of IHF's weight. Other top holdings include WellPoint (NSYE: WLP), Aetna (NYSE: AET) and Humana (NYSE: HUM).

S&P also placed overweight ratings on the iShares Dow Jones U.S. Healthcare Sector Index Fund (NYSE: IYH) and the iShares S&P Global Healthcare Sector Index Fund (NYSE: IXJ).

For more on health care ETFs, click here.


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