Today the world woke up to the reality of a US federal government shutdown due to an inability to negotiate a new budget, but one facet of the economy that seems to be churning forward is health care. Today marks the first open day of the much anticipated health care exchanges that were created as a result of the Affordable Care Act. They were formed with the notion of giving all Americans the ability to purchase affordable health care coverage for themselves and their family.
There are more than likely going to be a few kinks to work out of the system in the coming months as the new laws and exchanges are implemented. However, with the health care industry on the cusp of fundamental change, I thought it prudent to check in on the trend of related ETFs that may be impacted (either positively or negatively) by this transition.
The largest health care related exchange-traded fund is the HealthCare Select Sector SPDR
(NYSEARCA:XLV) which holds 57 unique large-cap companies engaged in pharmaceuticals, biotechnology, and medical equipment services. XLV currently controls over $7.5 billion in total assets and charges an annual expense ratio of just 0.18%. The top-three holdings include Johnson and Johnson
(NYSE:JNJ), Pfizer Inc.
(NYSE:PFE), and Merk & Co.
As you can see by the price trend in the chart above, XLV has been a dominant force in 2013 with gains of nearly 30% this year. If you think that’s impressive, consider that the iShares NASDAQ Biotech ETF
(NASDAQ:IBB) has gained more than 46% over the last 52 weeks. It’s plain to see that investors have been flocking to not only traditional dividend-minded plays in the health care space, but also seeking out innovative growth strategies in the form of biotechnology stocks. According to Index Universe
, XLV and IBB have attracted a combined $1 billion in new assets since the beginning of the year.
Another added benefit of the health care stocks is that they are considered defensive in nature because their business models are non-cyclical. Pfizer alone is hoarding billions of dollars of cash on its balance sheet and continuing to store money for a rainy day. This cash could eventually be used for additional dividends to shareholders, share buybacks, new business acquisitions, or development of innovative products -- all of which may ultimately boost investor demand and the price of the company’s stock.
The future of the health care sector looks bright as an aging baby boomer population will require continued advances in medical technology and rising health care costs boost profits for pharmaceutical and service companies. The addition of the newly established health care exchanges will likely pump more money into this sector as insurance and other health care related companies ramp up their game and adapt to the new regulatory environment.
I am hesitant to recommend a headlong advance into health care ETFs right now solely because of the stretched nature of the price trend. Biotech stocks in particular look very strong as IBB makes new highs today. My suggestion is to wait for a modest pullback before putting additional money to work in either broad-based health care ETFs or more aggressive biotech names. If you already have exposure to these sectors, then by all means continue to ride the trend and trail your stops higher to lock in gains.
Read more from David Fabian, Managing Partner at FMD Capital Management:
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No positions in stocks mentioned.