The health-care sector is often considered a tried-and-true investment with solid long-term upside potential as an aging population requires increasing amounts of medical care.
But this consistent earner is looking a bit sickly compared to the broader market as the S&P health-care select sector index is up 2 percent year to date versus the S&P 500, which is up 11 percent. Given the healt-care sector’s usual haleness, does the current underperformance represent a chance to buy the dip, or is it a sign the lethargy is masking other infirmities?
Katherine Schoen, manager of private wealth management equity and fixed-income research for Baird, says health care might be under the weather for a while because of politics. Whether its Democratic candidates discussing changes to the current health-care system with a “Medicare for all” program, or bipartisan interest in Congress to improve drug-pricing transparency, health care is in the political crosshairs on several fronts, she says.
“That’s what the headwind is,” Schoen says. “That why these multiples haven’t kept up with their defensive peers and why performance hasn’t kept up. What the market doesn’t like is the unknowns.”
Nick Kalivas, senior strategist at Invesco, concurs with Schoen. From a broad perspective, health care typically has the demographic trend of an aging population and the growth potential of product innovation going for it. Plus, it often finds favor with investors at this point in the economic cycle. However, this time is different because of politics.
“I think it’s probably going to be a headwind here for the foreseeable future,” he says.
Nothing is likely to get done in Congress until after the election and people will want to see what is the leadership in Washington in 2020, Kalivas says. That could mean the health-care sector is going to be sensitive to polling data and expectations for how the election plays out.
Given the sector’s weakness, it’s not surprising some the top broad-based health-care exchanged-traded funds are looking a bit wheezy in performance terms.
The Health Care Select Sector SDPR Fund (XLV), the oldest of the health-care ETFs and the largest at $17 billion in assets under management, is up 2 percent year to date. It’s a market cap-weighted fund that follows the S&P Health Care Select Sector Index. The top sector is pharmaceuticals at 43 percent, with health-care equipment at 27 percent and health-care providers at 13 percent. Johnson & Johnson is the fund’s biggest holding at 11 percent, with UnitedHealth Group and Pfizer each at 7 percent. Its expense ratio is 0.13 percent.
The fund has returned 7 percent during the past year, and is up 9 percent on a three-year annualized basis and 9.7 percent on five-year basis. Comparatively, the SPDR S&P 500 Trust (SPY) is up 12 percent year to date and 4.3 percent during the past year. Its average annual three-year return is 12 percent and its average five-year return is 10 percent.