Healthcare ETFs: Looking Beyond the Political Risk

One of the few bright spots in an otherwise schizophrenic market has been healthcare. One of my favorite sub-segments, Medical Devices (IHI), has even gone so far as to linger near 52-week highs.

(Read more about the regulatory-resistant medical device arena right here.)

Yet I admit to being a little wary of the surge in drug-distributors. SPDR Pharmaceuticals (XPH) is atop the leader-board for performance through August 28, alongside Med Devices (IHI). Both players have logged 1-month, 3-month, 6-month and 1-year gains.

Conventional wisdom has suggested that, should Obama win, Big Pharma would suffer from a squeeze in profit margins. Add the general uncertainty of who might win the election, and one might view pharmaceutical investing as "sketchy."

Of course, investing is never one-dimensional. And that means... political risk is not solely responsible for moving SPDR Pharma (XPH) one way or another.

Demographics favor drugs with an aging population. Technical trends favor drugs, as both the SPDR Pharma (XPH) and the iShares Dow Jones Pharma Fund (IHE) sit above short- and long-term moving averages. Economic conditions favor the defensive drug segment. And fundamental value favors the dividend-paying, low-P/E corporations like Pfizer, Merck and Sanofi-Aventis. (XPH, for instance, is roughly trading at a P/E sub 14.)

So if political risk is the super fly in the ointment, it hasn't hampered recent enthusiasm. Meds have definitely been on the upswing.

In fact, investors may even be bucking traditional wisdom about the next administration. For instance, Obama has been pushing more affordable health care, not universal health care. Now that the last nail has been hammered into Hillary's coffin, investors may regard Obama or McCain as less likely to interfere with the bottom line of drug makers and drug distributors.

There's only one thing that we can tell for sure: Healthcare ETFs have surged at a time that very little else can claim victory.

Naturally, not every sub-segment has prospered. The iShares HealthCare Providers (IHF) and the PowerShares HealthCare Services (PTJ) are still plagued by the possibility of greater Federal oversight. The returns in these two ETFs have been more dismal than the S&P 500 benchmark.

Disclosure Statement: ETF Expert is a web log ("blog") that makes the world of ETFs easier to understand. Pacific Park Financial, Inc., a Registered Investment Advisor with the SEC, may hold positions in the ETFs, mutual funds and/or index funds mentioned above. Investors who are interested in money management services may visit the Pacific Park Financial, Inc. web site.

Comments

[Adam Zuercher]

Gary,

Thanks for the great post. The health care sector ETF (XLV) has outperformed the S&P 500 ETF by 12.6% over the last 3 months (as of 8/21/08). Also, as you point out IHI has shown great leadership. I recently wrote on the leadership of healthcare @: http://adamzuercher.blogspot.com/2008/08/healing-ailing-stock-market.html

Adam