ETF Talk: Health Care Provides Investment Opportunity

Doug Fabian

Doug Fabian is known for his expert knowledge of ETFs, bear funds and enhanced index funds to profit in any market climate.

The health-care sector has faced heavy uncertainty in recent months, following the Supreme Court’s decision to uphold almost all of the Affordable Care Act — also known as “Obamacare.” With Republican presidential candidate Gov. Mitt Romney vowing to rescind Obamacare, the future of the health-care sector and the mandate that all citizens buy health insurance or pay a tax adds to the abyss of the unknown as November’s election approaches.

However, I’ve had my eye on one exchange-traded fund, the Health Care Select Sector SPDR Fund (XLV), which has risen more than 15% so far this year through yesterday’s trading, including two dividend payments.

The fund seems to have momentum, since it opened trading at $35.10 on Jan. 3, and had risen to $40.18 by midday today, Sept. 19. Established on December 16, 1998, the Health Care Select Sector SPDR Fund (XLV) seeks to closely match the returns and characteristics of the S&P Health Care select sector index. Simply put, the fund follows the performance of the health-care sector and the chart below shows its ascent during the past 12 months.

XLV’s top five holdings, as of Sept. 18, were: Johnson & Johnson, 12.23%; Pfizer Inc, 11.68%; Merck & Co Inc., 8.71%; Abbott Labs, 5.97%; and Amgen Inc., 4.14%. The fund’s biggest allocation is to pharmaceuticals, accounting for about half of its holdings. The second-biggest allocation features health-care providers and services, totaling about 20% of the portfolio.

In addition, the fund’s focus on health-care stocks means that XLV exposes investors to the risks associated with the sector. However, if the sector continues to perform well, the fund may provide significant upside. The fund currently trades at a slight premium to its net asset value of $40.01. This premium, combined with the uncertainty in the sector, warrants caution before you decide to invest. Nonetheless, this fund is worth monitoring in the coming weeks and months as Obamacare’s fate becomes clearer.

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If you want my advice about buying and selling specific ETFs, including appropriate stop losses, please check out my ETF Trader service. As always, I am happy to answer your questions about ETFs, so do not hesitate to email me by clicking here. You may see your question answered in a future ETF Talk.

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