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Here's Why Small-Cap HealthCare ETFs & Stocks Are Good Picks

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Healthcare stocks are seen as relatively defensive and can provide safety to one’s portfolio during market downturns, which has been the case this year now. Ebbing fears related to price gouging, flurry of positive clinical trials, increasing health care spending, decent valuation have also been benefiting the sector.

Two particular factors are likely to act as wind beneath the wings of the healthcare sector, pushing up small-cap healthcare stocks and the related funds.

Tax Reform

Per an article published on Reuters, domestically geared healthcare companies that focus on services are likely to benefit from the lower tax rate. These companies have limited international exposure and considerable capital expenditures, as per the source.

Mizuho Securities indicated that “tax reform should be a significant positive cash flow event, especially for healthcare services companies that tend to have limited international exposure and significant capital expenditures.”

Merger and Acquisition

The U.S. healthcare supply chain is consolidating fast, with deals across the industry ranging from insurers, pharmacies to drug distributors. According to an article published on Bloomberg, smaller insurers like WellCare Health Plans Inc. (WCG - Free Report) , Centene Corp. (CNC - Free Report) , Molina Healthcare Inc. (MOH - Free Report) and Obamacare-focused startup Oscar Insurance Corp. appear to be lucrative acquisition targets. These companies may merge among themselves or can be lapped up by larger insurers eyeing scale advantage in a specific business area (read: Cigna to Buy Express Scripts: Healthcare ETFs in Focus).

The range of M&A activity is spreading beyond the healthcare sector. Leerink Partners analyst Ana Gupte noted retail giant, Walmart Inc. (WMT - Free Report) “has a co-branded Medicare drug plan with Humana that steers patients to Walmart stores -- which could make the retailer a prospective buyer of Humana.”

Like many analysts, we also believe that, if, as an investor, one wants to make a lot from a buyout premium, targeting small-cap stocks would be the best choice.

Against this backdrop, we highlight a few small-cap oriented stocks and ETFs for investors.

ETF Picks

PowerShares S&P SmallCap Health Care Portfolio (PSCH - Free Report)

The fund targets the S&P SmallCap 600 Capped Health Care Index. The 77-stock fund has a keen focus on Healthcare Equipment, Pharmaceuticals Suppliers and Providers & Services, which account for about 75% of the portfolio. The fund charges 29 bps in fees (read: 5 ETFs to Bet on Post Fed Minutes).

SPDR S&P Health Care Services ETF (XHS - Free Report)

The underlying S&P Health Care Services Select Industry Index holds 49 stocks in its portfolio. Health Care Services comprises 37% of the fund, followed by Health Care Facilities (26.6%) and Managed Health Care (22.7%). The fund has 28% exposure to large-cap stocks while small-cap stocks hold 50% share. Mid-cap stocks comprise the balance, It charges 35 bps in fees.  

SPDR S&P Health Care Equipment ETF (XHE - Free Report)

The fund puts 78% focus on Healthcare Equipments while Health Care Supplies takes the rest of it. Small-cap stocks occupy the majority share, while around 21% is held by large-cap stocks.

Stock Picks

Almost Family Inc.

This Zacks Rank #2 (Buy) company is a regionally focused provider of home health services.

Market Cap: $817.9 million

Accuray Incorporated (ARAY - Free Report)

This Zacks Rank #2 stock is a global leader in the field of radiosurgery and a non-surgical treatment option for those diagnosed with cancer.

Market Cap: $494.7 million

Surmodics, Inc. (SRDX - Free Report)

It is a provider of surface modification technologies in the areas of biocompatibility, site specific drug delivery, biological cell encapsulation, and medical diagnostics and holds a Zacks Rank #2.

Market Cap: $ 448.04 million

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