In anticipation of President Barack Obama’s healthcare reform, healthcare stocks and related exchange traded funds (ETFs) performed strongly in the week ending June 19, 2009. Nine of the 10 S&P sectors finished in the red that week, led by Energy (-6.5%), Materials (-6.4%) and Industrials (-5.6%) while Health Care (+2.1%) was the only one in the black.
However, health care stocks, which have shown relative strength in recent sessions, fell 2.0% yesterday (June 24) as Barack Obama’s health-care reform plan met resistance from Republicans and even some members of his own party. So, how well did healthcare ETFs perform in the recent period? Which are the best and which are the worst performing healthcare ETFs?
Healthcare ETF universe
By the end of the first quarter of 2009, the global ETF industry had 1,635 ETFs with 2,857 listings, $633.55 billion in assets and 87 providers on 43 exchanges globally.
The number of healthcare ETFs increased from 25 at the end of 2008 to 36 currently. In 2008, healthcare ETFs posted a 23.5% loss over 2007 on an equal-weight basis with an average of about $400 million in net assets. However, the top eight ETFs by net assets accounted for 88.5% of all net assets for the entire group of 25, including Healthcare Sector SPDR (XLV), Pharma HOLDRs (PPH), iShares Nasdaq Biotech (IBB), Biotech HOLDRs (BBH), iShares Dow Jones U.S. Healthcare (IYH), iShares S&P Global Healthcare (IXJ), Vanguard Healthcare (VHT), and SPDR S&P Biotech (XBI). Only BBH managed to post a gain over 2007 due to a concentrated bet in the following three biotech blue chip companies: Genentech (DNA) (42.8%), Amgen (AMGN) (20.9%), and Gilead Sciences (GILD) (18.3%).
Healthcare is a defensive sector, meaning beta (market risk factor) is less than one. The sector hasn’t done well in 2008. So, why should anyone invest in healthcare stocks and related ETFs.
Reasons for investing in healthcare ETFs
Look at any broad based healthcare ETF – you find that pharma, biotechnology and life sciences companies account for a major portion of the holding. For instance, Pharmaceuticals, Biotechnology & Life Science sector currently accounts for 78.5% of the holdings. Pharmaceutical companies have loads of cash; their share prices are battered; have blockbuster drugs in the pipeline; and pay hefty dividends as well. Most of the major triple-rated diversified health companies are trading at their lowest valuations ever. For instance, JNJ (Johnson & Johnson), which has been a triple-A rated stock for more than 60 years, is trading at $55 compared with a 52-week high of 72.76.
As far as big biotech companies are concerned – they have kept losses in 2008 to the 15% range, and many are reaping big profits.
