Last year was quite an eventful one for the U.S. healthcare sector in particular. The economy witnessed the Republican tax reform becoming law and three rate hikes by the Fed. Thanks to both, healthcare was one of the top performers of 2017. The Health Care Select Sector SPDR ETF (XLV) rallied 19.5% year. This momentum is slated continue in 2018.
Moreover, investors no longer have to deal with fears related to over-pricing of drugs, with political voices on this issue mostly absent in recent times. Moreover, a higher number of FDA approvals and continued strong performance from legacy products have been instrumental in boosting gains. Considering all these factors, this might be the right time to bet on healthcare mutual funds.
Tax Reforms Likely to Boost Healthcare Stocks
The much-awaited tax cuts Bill was finally signed by President Trump on Dec 22, 2017 in the Oval office. The Bill permanently slashes corporate tax rates from 35% to 21%. In his comments, Trump pointed out that markets will benefit greatly from this legislation and that “corporations are literally going wild” following the Bill’s passage.
A major aspect of these tax reforms relates to repatriation of trillions of dollars held as cash reserves overseas by companies with global operations at a one-time rate of 8%. This could improve the overall financial health of big drug companies. Analysts have estimated that companies such as Pfizer Inc. and Merck & Co., with close to $100 billion in earnings overseas, would be major winners of such a policy.
Moreover, lower domestic rates would leave such corporations with more cash. This is likely to lead to a surge in mergers and acquisitions in 2018. Moreover, there has been a surge in the number of FDA approvals of late. This means that more cash reserves would lead to a higher number of drug trials in 2018 and consequently, development of newer products.
Finally, domestically focused companies that provide only healthcare services would also benefit from a low tax rate. Companies from the sector with limited international exposure and significant capital expenditures would likely enjoy positive cash flows in 2018.
End to Drug Pricing Woes?
Healthcare was hit hard before the presidential election after allegedly exorbitant drug prices were highly criticized by Hillary Clinton. Clinton had tweeted about "price gouging" and framed a proposal to combat skyrocketing drug prices.
Not to be left behind, President Donald Trump’s tweet last year on March 7 relating to increasing competition and lowering drug prices sent fresh shockwaves across the industry. Trump had tweeted that his team was working on a ‘new system’ which would involve ‘competition in the Drug Industry.’ Since this tweet, Trump has never commented publicly about drug pricing. Moreover, it is highly unlikely that the issue would resurface in 2018.
Also, Trump's pledges to reduce FDA regulations, remove taxes and fees on pharmaceutical and medical-device manufacturers, and successful clinical trials for new drugs may prove to be a boon for the space. Meanwhile, some other factors that should continue having a positive impact on pharma and biotech stocks are a new product sales ramp up, R&D success and innovation, strong results, a higher number of FDA approvals, and continued strong performance from legacy products. (Read More)
Why Invest In Mutual Funds?
The question here is why should investors consider mutual funds? Reduced transaction costs and diversification of portfolios without several commission charges that are associated with stock purchases are the primary reasons why one should be parking their money in mutual funds (read more: Mutual Funds: Advantages, Disadvantages, and How They Make Investors Money).
5 Best Performing Healthcare Mutual Funds
We have highlighted five healthcare mutual funds sporting a Zacks Mutual Fund Rank #1 (Strong Buy) or 2 (Buy). Moreover, these funds have encouraging third-quarter and YTD returns. Additionally, the minimum initial investment is within $5000 and net assets are above $50 million.
With a drastic reduction in domestic tax rates, the healthcare sector is poised to gain significantly. Further, there has been a significant increase in the number of
FDA approvals which also resulted in the development of newer products. This makes it the right time to invest in healthcare mutual funds.
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 Biotechnology (FBIOX - Free Report) invests the majority of its assets in securities of companies principally engaged in the research, development, manufacture, and distribution of various biotechnological products. The fund invests in domestic and foreign issuers and has a Zacks Rank #1.
FBIOX has an annual expense ratio of 0.74%, which is below the category average of 1.32%. The fund has three-year and YTD returns of 3.2% and 27.9%.
Hartford Healthcare HLS Fund IA (HIAHX - Free Report) invests the lion’s share of its assets in equity securities of companies engaged in the healthcare industry. These companies are located in different nations 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. It has a Zacks Rank #2.
HIAHX has an annual expense ratio of 0.89%, which is below the category average of 1.32%. The fund has three-year and YTD returns of 7.9% and 22.3%, respectively.
Janus Henderson Global Life Sciences Fund T (JAGLX - Free Report) invests in securities of companies that have a life science orientation. JAGLX invests a minimum of one-fourth of its assets in securities issued by companies that are categorized in the "life sciences" sector. The fund seeks capital appreciation for the long run. It has a Zacks Rank #2.
JAGLX has an annual expense ratio of 0.93%, which is below the category average of 1.32%. The fund has three-year and YTD returns of 4.8% and 22.5%, respectively.
T. Rowe Price Health Sciences (PRHSX - Free Report) invests a major portion of its net assets in common stocks of companies involved in research, development, production, or distribution of products or services related to health care and life sciences. PRHSX may invest in companies of any size, however, the majority of its assets is invested in large and mid-capitalization companies. It has a Zacks Rank #2.
PRHSX has an annual expense ratio of 0.77%, which is below the category average of 1.32%. The fund has three-year and YTD returns of 8.6% and 28%, respectively.
Fidelity Select Health Care Svcs Fund (FSHCX - Free Report) seeks capital appreciation. FSHCX normally invests at least 80% of assets in common stocks of companies principally engaged in the ownership or management of hospitals, nursing homes, health maintenance organizations, and other companies specializing in the delivery of healthcare services. It has a Zacks Rank #1.
FSHCX has an annual expense ratio of 0.78%, which is below the category average of 1.32%. The fund has three-year and YTD returns of 10.3% and 24.3%, respectively.
Want key mutual fund info delivered straight to your inbox?
Zacks' free Fund Newsletter will brief you on top news and analysis, as well as top-performing mutual funds, each week. Get it free >>