Slump Could Be Healthcare ETF Buying Opportunity

Over the past 90 days, 15 of the 20 worst-performing non-leveraged exchange traded funds are energy funds. Underscoring the weakness in the healthcare sector, four of the other five offending ETFs are healthcare funds.

Year-to-date, the Healthcare Select Sector SPDR XLV, the largest healthcare ETF by assets, is down 8.5 percent. That confirms XLV's best-to-worst slide. From 2013 through 2015, XLV was one of the top-performing SPDRs as healthcare played a significant part in lengthening the bull market that started in March 2009.

Diversified healthcare ETFs, such as XLV, benefited from surging biotechnology stocks, but have recently succumbed to that industry's doldrums. Remember the four lagging healthcare funds mentioned at the start of this piece? All are biotech ETFs and that is bad news for a fund like XLV that devotes over 23 percent of its weight to biotech stocks. http://www.benzinga.com/analyst-ratings/analyst-color/16/02/6218736/a-checkup-on-a-big-healthcare-etf

Some market observers believe healthcare's recent slide is a buying opportunity. Add to that, the political consternation that is widely attributed as one of the primary drags on the sector is seen as overdone.

“When we think about the concerns over drug pricing in the U.S., we think this is overdone as well. While we think there could be some slight reforms, generally speaking, we don't anticipate the U.S. government to enact major reform. So, that should enable drug prices to actually hold up pretty well. Within this context, we think the large-cap pharmaceutical stocks and the biotechnology sector look undervalued in our view,” said Morningstar.

The research firm is bullish on Dow component Pfizer Inc. PFE and biotech giant Biogen Inc. BIIB. Pfizer, XLV' second-largest holding, is in the process of acquiring Allergan Plc AGN, the ETF's fifth-largest holding. The two stocks currently combine for nearly 12 percent of XLV's weight.

Pfizer's Allergan acquisition should give it “a lot of faster-growing products relative to what it currently has along with a much lower tax rate,” said Morningstar.

Biogen, which accounts for nearly 2.4 percent of XLV's weight, “is a firm that specializes in multiple sclerosis drugs and has a pipeline focused in Alzheimer's disease. Both of those areas should have very strong pricing power going forward,” said the research firm.

Two biotech stocks are found in XLV's top 10 holdings. Healthcare services providers and equipment manufacturers combine for about a third of the ETF's weight.