Hot Health Care ETFs Face Head Winds

September 24, 2015

The broader health stocks, which include strong biotechnology data, look more like the rest of the market. Of concern are the rapidly increasing debt loads of health care firms. Debt-to-capital ratios have risen from the high 20 percent to more than 40 percent for biotechnology and more than 35 percent for broader health care. Both are increasing more rapidly than the market.

Morningstar Direct_Health care data

Two major demographic trends also benefit health care stocks.

First, the developed world’s population is aging. Health care spending is expected to grow at about 6 percent annually in the U.S. through 2023.

Second, many emerging markets have substantial population groups moving into the middle class, which should increase the percentage of income devoted to health care. Combined, the two demographic trends are expected to push health care revenue 7.4 percent higher.

Valuations And Returns
The improving ROEs and demographic trends seem well-baked into the stock prices. Compared with the broader market, price-to-earnings ratios are higher, and have accelerated in recent years.

Price-to-sales ratios also show more rapid increases by health care stocks than the overall market, and outperformance per year of 6 percent for five years reflects a fair amount of improving fundamentals.


Morningstar Direct_Health care data

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