That Was Fast: Healthcare ETF Races To New Highs

The healthcare sector, the third-larges sector weight in the S&P 500, is providing a case study for the theory that one year's laggard group can be a leader the following year.

As was widely documented, healthcare was the only one of the 11 sectors tracked by the S&P 500 to notch a negative annual performance last year. For example, the Health Care Select Sector SPDR XLV, the largest healthcare exchange traded fund by assets, fell modestly last year, notching its first negative annual performance since 2008.

However, XLV is proving to be one of 2017's more notable rebound acts. The behemoth healthcare ETF is up nearly 10 percent and was one of 110 ETFs to hit new 52-week highs Wednesday. Underscoring some broader strength in the sector, XLV was one of five healthcare ETFs to accomplish that feat.

XLV “has attracted a notable over $1.6 billion in new assets via creation flows year-to-date. Being a diversified Health Care fund, the ETF holds positions in pharmaceutical manufacturers, health insurers, biotechs, as well as medical device manufacturers,” said Street One Financial Vice President Paul Weisbruch in a note Wednesday.

Perhaps part of the bullish thesis surrounding XLV and healthcare at large is that election year rhetoric was an albatross on the sector and, obviously, the U.S. presidential election is in investors' rear view mirrors.

Some familiar names are bolstering XLV.

For example, Dow component Johnson & Johnson JNJ is up 11 percent year-to-date and is one of just eight members of the Dow to sport a double-digit gain to start 2017. Johnson and Johnson is by far XLV's largest holding. At a weight of almost 12 percent, the stock is nearly 500 basis points larger in XLV than Pfizer Inc. PFE.

“JNJ notably has been on a tear lately as well, also trading not only near a 52-week high, but near an all-time high,” said Weisbruch. “Optimism about tax cuts that would be favorable on a corporate level to the Healthcare industry certainly seems to be outweighing concerns about prescription drug costs coming down, as we recall on several occasions not only going back to last November, but in several months preceding the election. Back then, when the candidates, primarily Hillary Clinton, would speak about reducing prescription pill costs, the general effect was that Pharma stocks would get hammered on the rhetoric alone.”

Disclosure: The author owns shares of JNJ.