The U.S. health care sector was a star performer in 2013. It remained a favorite among investors in spite of the uncertain economic climate worldwide. New product launches, solid earnings results and increasing merger & acquisition activities were the major drivers for this sector.
Moreover, the pharmaceutical sector has seen one of the worst patent cliffs in recent times. Although genericization will continue in 2014, the major patent expiries are almost over.
The sector will continue to benefit from new product launches, pricing power, cost cutting strategies, in-licensing deals with major companies and growing presence in emerging markets (Read: A Comprehensive Guide to Pharma ETFs).
Also, as the Fed has already begun dialing back its monetary stimulus policy with more to come, the sector might continue to be a good defensive bet for investors looking to withstand the volatility in the market.
A bunch of ETFs within the Health & Biotech equities have already posted solid returns since the start of the year, clearly outpacing flat returns by the broader market index S&P 500 in the same time frame.
SPDR S&P Biotech ETF (XBI - ETF report), Dynamic Biotech &Genome (PBE - ETF report) and Nasdaq Biotechnology (IBB - ETF report) have all clocked returns exceeding 10% this year.
Given the bright future prospects of health care, a look at one of the top ranked ETFs in the space could be the way to target the best of the segment with lower levels of risk (Read: Healthcare ETFs in Focus on JNJ Beat).
About the Zacks ETF Rank
A look at top ranked health care ETFs can be done by using the Zacks ETF Rank. This technique provides a recommendation for the ETF in the context of our outlook of the underlying industry, sector, style box, or asset class. Our proprietary methodology also takes into account the risk preferences of investors as well.
The aim of our model is to select the best ETFs within each risk category. We assign each ETF one of the five ranks within each risk bucket. Thus, the Zacks ETF Rank reflects the expected return of an ETF relative to other ETFs with a similar level of risk.
Using this strategy, we have found one ETF Ranked 2 or ‘Buy’ in the health care sector – SPDR S&P Pharmaceuticals ETF (XPH - ETF report) – which we have highlighted in greater detail below (see all Healthcare ETFs here).
SPDR S&P Pharmaceuticals ETF (XPH - ETF report)
Launched in June 2006, the product has $776.2 million in AUM and trades in more than 100,000 shares a day.
Being passively managed, the fund seeks to deliver the returns of S&P Pharmaceuticals Select Industry Index, before fees and expenses.
The fund holds 34 securities across the entire spectrum of market cap. While large caps dominate the fund forming 42% of total fund assets, mid caps and small caps occupy the rest.
The product is well spread across each security as the top 10 holdings account for less than 40% of the total assets. Moreover, none of the stocks has more than 4.5% exposure in the fund.
Style wise, the fund primarily invests in stocks exhibiting growth characteristics (65%), while value and blend stocks form the rest of the portfolio.
The fund holds some of the best stocks in the health care sector in its portfolio. Jazz Pharmaceuticals plc (4.26%), Pacira Pharmaceuticals Inc. (4.17%) and Allergan Inc. (3.96%) are the top three holdings of the ETF (Read: 3 ETFs to Watch for Big Moves This Year).
The fund has greatly benefited from the strong performance of Jazz. The company recently hit a 52-week high after it presented an encouraging outlook at the J.P. Morgan conference. Jazz Pharma is looking to cross the $1 billion revenue mark in 2014, driven by continued growth of existing drugs and further label expansion and pipeline development.
XPH returned a stellar 60% last year while it has added triple-digit returns in the last three years. The product has some strong trends at its back thanks to the health care law changes, and it could look for some more solid trading this year as well.
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