After an impressive run in 2014, the health care sector is outperforming the overall market this year too with almost all ETFs returning in green and the best performing product Medical Breakthroughs ETF (SBIO) returning as much as 50% so far this year.
This bullish run in both pharma and biotech segments can be attributed to strong earnings growth, merger and acquisition frenzy, encouraging industry fundamentals, promising new drugs, growing demand in emerging markets and ever-increasing health care spending. In addition, the Affordable Care Act (often known as Obamacare) – which looks to expand the base of insured persons across the U.S. – is driving further growth in the sector.
Mergers are in full swing in the sector. Weaker margin and higher regulatory interference, thanks to Obamacare, led companies to consolidate within the sector (read: Pharma ETFs Soar on Acquisition Spree).
According to the latest data released by Dealogic, the value of M&A in the U.S. health care sector took the top position in the first half of this year with $293.6 billion from 537 deals. This represents the largest volume ever in any semi-annual period and a 73% annual rise. The sector actually has been the leader in terms of M&A activity in three of the last five quarters.
Some of the mega merger deals of this year include AbbVie (ABBV) acquiring Pharmacyclics, Inc. in a transaction valued at $21 billion. Aetna agreed to acquire competitor health insurer Humana (HUM - Free Report) for $34.1 billion in a cash and stock deal that will reduce the number of managed care players from the current five to four. There are speculations about Teva looking to acquire Mylan and Mylan targeting Perrigo.
Moreover, 2015 has so far been pretty rocky for the global investors with the U.S. thoroughly being in a rate hike dilemma, global growth worries posing occasional threat and the nagging Greek debt deal saga resurfacing once again. In this scenario, the sector’s inherent defensiveness amid widespread volatility added to its appeal. The sector is expected to deliver an impressive performance in the Q2 earnings season. It is expected to post 7% growth in the top line and 6.9% increase in the bottom line.
In such a scenario, let us look at some outperformers in the space seems an intriguing idea. These funds have enjoyed a strong momentum in the year-to-date period and are expected to continue leading the health care space going forward (see all Health Care ETFs here).
PowerShares S&P SmallCap Health Care Portfolio (PSCH)
This ETF has been the clear winner in the broad health care world, returning nearly 24% so far this year and has been up 3.7% over the past one month. The fund offers concentrated exposure to small cap health care securities. It tracks the S&P Small Cap 600 Capped Health Care Index and holds 73 securities in its basket, with each security holding less than 3.93% share. From an industry perspective, about one-third of the portfolio is allotted toward health care equipment and supplies, followed by health care providers and services (28.3%) and pharmaceuticals (15.7%).
The ETF has amassed $233.8 million in asset and trades in lower volume of about 25,000 shares per day, while charging a relatively low fee of 29 bps a year. The fund has a Zacks ETF Rank #1 (Strong Buy) with a High risk outlook (read: 2 Hot Sector ETFs Soaring to Rank #1 This Summer).
PowerShares Dynamic Healthcare Sector Portfolio (PTH - Free Report)
This fund follows the Dynamic Healthcare Sector Intellidex Index and holds a basket of 48 U.S. companies. The product has accumulated AUM of $233 million and charges 60 bps in fees and expenses from investors.
The product is well spread out across market cap levels with small caps (41%), large caps (40%) and mid caps (19%). In terms of industrial exposure, the fund is heavy on Biotechnology that makes up for 48% share while Health Care Providers (22.16%) and Health Care Equipment (13.17%) round off the next two spots. PTH returned about 21.8% in the year-to-date time frame and 6% in the last one month. The fund has a Zacks ETF Rank #3 (Hold) with a High risk outlook.
iShares U.S. Healthcare Providers ETF (IHF)
This ETF follows the Dow Jones U.S. Select Healthcare Providers Index with exposure to companies that provide health insurance, diagnostics and specialized treatment. The product holds 51 securities in its portfolio. The fund has been able to attract $1.05 billion in assets so far. It charges 43 bps in annual fees and expenses and has gained almost 21.2% so far this year and 1.8% in the last one month. The fund also has a Zacks ETF Rank #1 with medium risk outlook.
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