Health Care ETFs Outpacing Market

September 15, 2014

Obamacare is adding fuel to a rally two-plus years in the making.

The Affordable Care Act, also known as Obamacare, is boosting health care spending, offering increasing support to a sector of the economy that continues to outperform the broader market. ETFs that invest in health care are delivering outsized returns relative to the S&P 500 Index in a pattern that has been in place for more than two years now.

Year-to-date, health care is the best-performing sector in the S&P 500 Index, delivering twice the returns of the broad index itself. The sector is up 16 percent since the beginning of the year, while the S&P 500 is up about 8 percent.

Funds like the Health Care Select SPDR (XLV | A-91), which has more than $11 billion in assets, are racing higher and breaking through record levels, much like the competing iShares U.S. Healthcare ETF (IYH | A-95), which has $2.6 billion in assets, and the Vanguard Healthcare ETF (VHT | A-93), with $3.3 billion. These ETFs offer market-cap-weighted, broad exposure to the segment.

Even more impressive has been the run-up of the First Trust HealthCare AlphaDex ETF (FXH |A-64), a $2.3 billion ETF that picks its stocks from the Russell 1000. The alpha-seeking methodology scores securities on factors such as growth and value, divides them into groups based on their rankings, and gives the top-ranked group a higher weight in the mix, according to First Trust.

In the end, the stocks in the portfolio are equally weighted within each group for a performance that’s been slightly outshining its market-cap peers. The chart below shows the total returns of FXH, and two of the biggest broad health care ETFs relative to the SPDR S&P 500 (SPY | A-99) so far this year.

Health_ETFs_YTD_Perf

Chart courtesy of StockCharts.com

Solid Case For Health Care Stocks

This upward trajectory is showing no signs of slowing down, and Obamacare has a lot to do with that. The law, passed in March 2010, but which has been slowly implemented, set out to increase access to health care by lower-income Americans, and requires everyone to be insured.

While implementation of the law has been rocky, and is not expected to be fully completed until 2020, it has already impacted companies in the sector. For example, the Commerce Department’s latest figures showed a jump of 3 percent in total revenue for health-care-related businesses in the second quarter—a sign that consumers are spending more money in hospitals and doctors’ offices, Bloomberg reported this week.

 

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