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3 Reasons to Bet on Healthcare ETFs

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The broader medical sector should be in the spotlight now on hopes of a coronavirus vaccine and the likelihood of a divided congress. With results of the final-stage clinical trial starting to come in, the pharma sector could see smooth trading in the coming days. Below we highlight the factors in detail that could be push the sector higher ahead and benefit these ETFs.

Vaccine Optimism

Pfizer (PFE - Free Report) said on Nov 9 that its COVID-19 vaccine was more than 90% effective based on interim trial results, considerably higher than the at least 50% efficacy that regulators are looking for. Then, Moderna Inc. (MRNA - Free Report) said on Nov 11 that it has sufficient data for a first interim analysis of the late-stage trial of its experimental COVID-19 vaccine to determine the vaccine's efficiency level. Moderna, which uses a similar messenger RNA technology as Pfizer, indicated that its November timeline for initial data was in full swing, per Reuters.

AstraZeneca (AZN - Free Report) , another prominent vaccine maker, missed a September deadline for its COVID-19 vaccine in the United Kingdom, and it's going to offer fewer doses than previously projected by the year-end. But its COVID-19 vaccine candidate has been proven to produce immune responses in both adults and young people. CEO Pascal Soriot says delays in its clinical trial led the company to postpone manufacturing, the upheaval was not caused by AstraZeneca’s inability to produce adequate vaccines.

If this was not enough, on Nov 9, Eli Lilly and Company (LLY - Free Report) became the latest drugmaker to get approval from the FDA for the emergency use of its antibody drug. Last month, the FDA had approved Gilead Sciences’ (GILD - Free Report) antiviral drug remdesivir as a treatment for coronavirus.

Likelihood of a Divided Congress in United States

Healthcare space is a beneficiary of the likelihood of a divided Congress with drugmakers and health insurers having been the biggest gainers. “Even though drug pricing and reimbursement reform have seen support from both Democrats and Republicans, we expect the Senate’s filibuster-proof, 60-vote supermajority requirement to pass major legislation will shield the biopharma industry from the most controversial reforms,” SVB Leerink Geoffrey Porges told clients in a research note, reports Bloomberg, as quoted on Aljazeera.com.

An analyst with Jefferies sees continued deal activity in the healthcare space. The sector is exposed to less risk from a corporate tax hike and price gouging issue, if there is divided Congress. iShares U.S. Healthcare Providers ETF (IHF) and Invesco Dynamic Pharmaceuticals ETF (PJP - Free Report) may thus continue their winning run (read: Here's Why Healthcare ETFs Are Rallying Post Elections).

Upbeat Earnings of the Sector

The ongoing third-quarter earnings season has been upbeat for the space. Per the Earnings Trends issued on Nov 11, 2020, about 96.4% of the companies in the Medical sector have reported so far. Within the group, about 88.7% beat on earnings (up 16.6% year over year) and 86.8% surpassed on revenues (up 12.0% year over year).

The sector is likely to log 8.3% earnings growth in 2020 compared with a 17.4% decline in the S&P 500 earnings. The winning momentum will likely be carried forward in 2021 too with projected earnings growth of 10% (S&P 500 is expected to record 21.8% next year).

ETFs in Focus

SPDR S&P Pharmaceuticals ETF (XPH - Free Report) (up 7.0% past week), SPDR S&P Health Care Services ETF (XHS - Free Report) (up 6.9% past week), VanEck Vectors Pharmaceutical ETF (PPH - Free Report) (up 6.7% past week), First Trust Nasdaq Pharmaceuticals ETF (FTXH - Free Report) (up 6.5%) and Invesco S&P SmallCap Health Care ETF (PSCH - Free Report) (up 6%) are some of the funds that have been trending.

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