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The Healthcare sector has continued its streak of outperformance in 2014 as well. While the broader market index, S&P 500, saw a poor start, closing January with three straight weekly losses, the health care sector took the second best performing spot.
 
Higher merger and acquisition activities, new drug launches, an aging population and increasing healthcare spending are the major factors benefiting this sector.
 
Moreover, the Affordable Care Act (popularly labeled ‘Obamacare’) is also expected to be highly beneficial for this sector. The Act is expected to boost the number of insured Americans across the country.
 
More Americans will now be able to afford medicines, which could enhance the sales potential of the drug companies and bode well for the healthcare industry on the whole (read: Obamacare Will Be Amazing for These Stocks and ETFs).
 
With most of the S&P 500 companies having reported their fourth quarter 2013 earnings, the Healthcare sector has emerged as one of the best performing this season.
 
The yardstick for this success was the most number of companies beating earnings estimates within a sector. Around 86% of Healthcare companies have reported earnings above estimates.
 
Given these positive trends, a look at some of the top ranked ETFs in the space could be the way to target the best of the segment with lower levels of risk (see: all the Healthcare ETFs here).
 
Top Ranked Healthcare ETF in Focus
 
The Zacks ETF Rank provides a recommendation for the ETF in the context of our outlook for the underlying industry, sector, style box or asset class (read: Zacks ETF Rank Guide). Our proprietary methodology also takes into account the risk preferences of investors as well.
 
The aim of our models is to select the best ETFs within each risk category. We assign each ETF one of five ranks within each risk bucket. Thus, the Zacks ETF Rank reflects the expected return of an ETF relative to other products with a similar level of risk.

For investors seeking to apply this methodology to their portfolio in the Healthcare equities space, we have taken a closer look at the top ranked XHS. This ETF has a Zacks ETF Rank of 2 or ‘Buy’ (read: all the Top Ranked ETFs) and is detailed below.
 
SPDR S&P Health Care Services ETF (XHS - ETF report)
 
Launched in September 2011, the fund tracks the S&P Health Care Services Select Industry Index, holding a small bunch of 52 stocks in its basket. The index is a modified equal weight benchmark and seeks to provide exposure to U.S. healthcare stocks.
 
The product is well diversified as far as individual holdings are concerned, as none of the stocks form more than 3% of the total fund holdings. BioScrip Inc. (2.88%), Health Net Inc. (2.56%) and Tenet Healthcare Corporation (2.52%) are the top three holdings of the fund.
 
As far as sector allocation is concerned, Health Care Services occupy the top spot, holding around one-third of the fund assets. This is followed by Health Care Facilities (27.95%), Managed Health Care (22.53%) and Health Care Distributors (16.27%).
 
With an allocation of over 33% to hospitals and health care service providers, XHS is expected to be one of the ETFs greatly benefiting from Obamacare. Thanks to the Affordable Care Act, more and more people are now expected to have the insurance to visit hospitals for procedures. The hospitals will stand to benefit as unlike the past these will no longer be providing a lot of services for free.
 
The fund is a little unpopular in its space, with an asset base of $68.3 million and light volumes of just 5,389 shares a day. The fund charges 35 basis points as fees to investors (read: 3 Top Ranked Healthcare ETFs in Focus).
 
XHS returned a robust 34.66% in 2013 and also pays a dividend of 0.46%, and we are looking for more solid trading out of this fund in 2014 as well.
 
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