Healthcare was the second-best performing sector among the 11 major S&P 500 sectors in the first half of this year. The sector was in focus mainly because of the “Repeal and Replace Obamacare” scenario. Despite multiple attempts, the Trump-led Republican administration failed to replace the existing healthcare bill, Obamacare with a new one. It isn't just hospitals that will benefit from this development. With reduced possibilities of “Repeal and Replace” of the Obamacare scenario, the ability of Americans to avail various healthcare services remains intact.
Additionally, biotech companies are on the verge of a break out, cashing in on Trump’s tax plan, spurring a wave of buyouts. At the same time, innovation in the sector has reached exponential levels even as the outrage over drug price eases. This is why investing in mutual funds with significant exposure to the healthcare sector could be one of the most suitable investment options at present.
Senate Healthcare Bill Versus Obamacare
Despite strong expectations over President Trump’s healthcare bill, the administration faced a setback in March. The bill was pulled out from the House floor because of lack of enough votes. In June, the Senate issued its version — the Senate Healthcare Bill. This version stated that Medicaid expansion under Obamacare will be maintained for the next three years and will be rolled back in 2021. However, states will receive a fixed amount instead of open-ended funding.
Under Obamacare, Medicaid was expanded to provide health coverage to millions of low-income Americans who couldn’t afford it. In this context, if Obamacare is repealed without proper replacement then hospital stocks may come under pressure. This is mainly because hospitals benefited under Obamacare with more than 20 million people gaining coverage.
Also, unlike Obamacare, which offeredpremium subsidies as per enrollees' income and cost of coverage, the Senate Healthcare Bill provided refundable tax credits mainly as per their age. So the bill is likely to go against older consumers. For example, a 29-year-old enrollee would pay around 6.4% of his income for premiums, while a 60-year-old may have to shell out nearly 16.2% of his income.
Biotech Companies Gain Momentum in 1H17
President Trump’s business tax plan should benefit biotech companies. He plans to trim the business tax rate to 15% from 35%. Trump has promised to change the tax code, which in turn is expected to spur a series of buyouts in the innovation-starved biotech sector. If biotech companies manage to repatriate hundreds of billions of dollars stranded in overseas operations, it will boost the sector’s merger and acquisition activities.
Moreover, Washington will find it hard to impose any stringent price control with Tom Price as secretary of Health and Human Services since he has a history of rejecting such policies. This in turn has eased concerns over President Donald Trump’s warning of excessive drug pricing to the biotech industry. iShares Nasdaq Biotechnology ETF (IBB) increased 16.8% in the first half of 2017.
Top 4 Healthcare Mutual Funds of First Half 2017
These bullish factors call for investing in healthcare funds. Mutual funds are perfect choices for investors looking to enter this sector since they possess the advantages of wide diversification and analytical insight.
Additionally, recent data related to the healthcare sector clearly indicates strong growth. This is borne out by the fact that the Health Care Select Sector SPDR (XLV) gained 14.9% in the first six months of 2017, emerging as the second-best performing sector among the S&P 500. Additionally, mutual funds related to this sector also registered strong returns. According to Morningstar, healthcare mutual funds have returned 19.1% so far this year.
We have, thus, selected four top performing healthcare mutual funds. These have given impressive returns in the first half and year-to-date (YTD) periods. These funds sport a Zacks Mutual Fund Rank #1 (Strong Buy) or 2 (Buy), offer a minimum initial investment within $5,000 and carry a low expense ratio.
We expect these funds to outperform their peers in the future. Remember, the goal of the Zacks Mutual Fund Rank is to guide investors to identify potential winners and losers. Unlike most of the fund-rating systems, the Zacks Mutual Fund Rank is not just focused on past performance, but also on the likely future success of the fund.
Fidelity Select Health Care Services Portfolio (FSHCX - Free Report) invests the bulk of its assets in companies that either own or are involved in operating hospital and nursing homes, and are related to the healthcare services sector. The fund focuses on acquiring common stocks of issuers all over the world.
FSHCX has an annual expense ratio of 0.78%, which is below the category average of 1.30%. The fund has first-half and YTD returns of 12% and 16.8%, respectively. The fund has a Zacks Mutual Fund Rank #1.
Franklin Biotechnology Discovery A (FBDIX - Free Report) invests the lion’s share of its assets in securities of companies from the biotechnology domain. The fund may invest a maximum of one-fifth of its assets in equities as well as debt securities of U.S. and non-U.S. biotech companies. FBDIX is a non-diversified fund.
FBDIX has an annual expense ratio of 1.02%, which is below the category average of 1.30%. The fund has first-half and YTD returns of 15.1% and 20.1%, respectively. The fund has a Zacks Mutual Fund Rank #2.
Hartford Healthcare HLS Fund IA (HIAHX - Free Report) invests the bulk of its assets in equity securities of companies engaged in the health care industry. These companies are located globally, including the United States. HIAHX may invest in securities issued by companies of any market capitalization. The fund seeks appreciation of capital for the long run.
HIAHX has an annual expense ratio of 0.89%, which is below the category average of 1.30%. The fund has first-half and YTD returns of 22.1% and 23%, respectively. The fund has a Zacks Mutual Fund Rank #1.
Fidelity Select Medical Equipment & Systems (FSMEX - Free Report) invests the majority of its assets in securities of companies principally engaged in research, development, manufacture, distribution, supply, or sale of medical equipment and devices and related technologies. The fund seeks growth of capital by investing primarily in common stocks.
FSMEX has an annual expense ratio of 0.76%, which is below the category average of 1.30%. The fund has first-half and YTD returns of 25.7% and 25%, respectively. The fund has a Zacks Mutual Fund Rank #1.
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