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Are Healthcare ETFs Poised for a Comeback?

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The healthcare sector has been subdued this year with the largest ETF Health Care Select Sector SPDR Fund (XLV - Free Report) (up 7.46%) underperforming the SPDR S&P 500 ETF (SPY - Free Report) (up 11.97%). However, the trend appears to be changing of late. Experts like CNBC’s Jim Cramer believes that healthcare stocks are due for a revival. What could drive the rebound?

Q1 Earnings Growth Picture Positive for Medical

Healthcare is now among the very few sectors that are likely to record double-digit revenue growth (up 10.4%) in first-quarter 2021, per Earnings Trends issued on Apr 16, 2021. Earnings expectations are also upbeat with the key U.S. index likely to log 18.2% growth in the first quarter of 2021. In comparison, S&P 500 earnings are likely to gain 27.1% in the quarter on 6.2% higher revenues.

Most recently, the largest U.S. health insurer UnitedHealth Group (UNH - Free Report) reported better-than-expected first-quarter 2021 results wherein it breezed past the Zacks Consensus Estimate on both earnings and revenues. UnitedHealth also lifted its full-year earnings outlook (read: Healthcare ETFs to Gain on UnitedHealth's Strong Q1 Earnings).

Undervalued Status

“This [healthcare] cohort had fallen so out of favor that it finally represented enormous value,” Jim Cramer said. The broader medical sector has a P/E 26.21X, which falls behind Business Services and Technology.  

Some specific industries of the Healthcare sector has a P/E less than even the S&P 500. For example, Hospitals has a P/E of 18.08X versus the S&P 500 ETF IVV’s 22.39X. The Dental Supplies industry has a P/E of 19.34X.  HMOs has a P/E of 19.34X.  Drugs and Generic Drugs have a P/E of 14.44X and 14.62X, respectively.   

Rising Deals Activities

The U.S. healthcare supply chain is consolidating fast, with deals across the industry ranging from insurers, pharmacies, MedTech to drug distributors. COVID-19 has pushed the area a notch higher.

Though there were 13 announced deals in Q1 of 2021 (compared to 29 in 2020), the average transaction size jumped, per an analysis from industry consultant Kaufman Hall, as quoted on healthcarefinancenews.com.

Average seller size by revenues for Q1 of 2021 – $676 million – is well above the historical averages for the first quarter and for recent year-end averages. The tally also marked the third-highest quarterly figure Kaufman Hall recorded in the past decade.

Most recently, Microsoft, in fact, doubled the healthcare market with the acquisition of Nuance – a cloud and software provider of conversational AI and cloud-based ambient clinical intelligence for healthcare systems.

In the MedTech space, some of notable deals in the past one year are Teladoc’s $18.5-billion Livongo acquisition and Abiomed’s acquisition of Breethe. Hologic’s recent $795 million-acquisition of Mobidiag Oy, a commercial stage developer of innovative molecular diagnostic tests also deserves a mention. IPO activities have been even more stellar with about 100 biotech-related IPOs taking place since January 2020.

ETFs in Focus

Against this backdrop, below we highlight a few healthcare ETFs that have been on an uptrend in the past one month.

iShares U.S. Medical Devices ETF (IHI - Free Report) – Up 8.96%

Global X China Biotech Innovation ETF (CHB - Free Report) – Up 7.26%

iShares Evolved U.S. Healthcare Staples ETF (IEHS - Free Report) – Up 6.53%

Invesco S&P 500 Equal Weight Health Care ETF (RYH - Free Report) – Up 6.21%

First Trust Health Care AlphaDEX Fund (FXH - Free Report) – Up 5.96%

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