Healthcare Mutual Fund/ETFs—YTD Highlights

After a very long stint near the top of the pack in performance, the healthcare sector, as measured by the S&P 500 select sector healthcare ETF (XLV), is now pulling up the rear. With three quarters down and one to go, the XLV is only up 0.11% compared with the S&P 500 index which is up around 6%. Healthcare’s 589 basis points of under-performance is making healthcare stocks look like dogs. Digging deeper though, the under-performance is due largely to big pharma and biotechnology. Bristol Myers, Alexion, Gilead, Mylan, Perrigo and others are each down 10 to 20% year-to-date (9/30/2016).

On the other hand, there are areas of major strength including the interventional cardiology companies and the medical device and equipment companies (see our March 2016 issue). Edwards Lifesciences, Medtronic, Stryker, Zimmer, ThermoFisher Scientific and Becton Dickinson and others in those subsectors are enjoying substantial gains. Fortunately, the In Sickness and Wealth portfolio has a healthy dosage of these types of investments.

As I was surveying healthcare’s strong points and weak points, I also wanted to see how the Mutual fund and ETF investments were holding up. Would the fund’s managers have avoided the biotech disasters and have healthier allocations to medical equipment and devices? It should come as no surprise that the top mutual fund (Fidelity Select Medical Equipment fund) had a healthy allocation to all the device companies mentioned above. In fact about 40% of the fund is in the five stocks mentioned above. While it has an excellent long term track record, it’s doing quite well this year with its large investments in Edwards, Medtronic and Stryker.

In the ETF space, both the iShares U.S. Medical Device ETF (IHI) and the S&P 500 Healthcare Equipment fund (XHE) had 18.71 % and 16.4% returns, respectively, so far in 2016. The Global X Longevity fund (LNGR) posted returns just under 10% YTD as well. LNGR is an ETF which invests in companies that attempt to manufacture equipment and devices that help an aging population live longer lives. It too, has a health concentration in device and equipment makers.

With 3 months left in the year, anything can happen. Biotech and big pharma can stage significant comebacks. They can go down in that time frame too. Or earnings jitters, election surprises and the problems with the European banking system could send stocks reeling. In future blogs/issues, we will address some of the macro risks that the healthcare sector may be impacted by. Until then, we’ll keep our weighting of device and equipment makers at its current level.

It should be noted that in terms of seasonal strength, we do tend to have stronger markets in the last 60-90 days of the year. But remember, seasonal tendencies are just that – tendencies.

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