The Health Care Select Sector SPDR (NYSEArca: XLV), the largest exchange traded fund dedicated to the S&P 500’s third-largest sector weight, tumbled last week, but some market observers believe the decline could be a buying opportunity.
XLV allocates about two-thirds of its combined weight to pharmaceuticals and biotechnology stocks. There are other catalysts to consider, including that the U.S. economy is moving into the late-cycle phase, overall growth may slow and signs of an economic slowdown could pop up. Consequently, investors may also turn to defensive sectors that are less economically sensitive, such as health care.
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Rivals to XLV include the iShares U.S. Healthcare ETF (NYSEArca: IYH). IYH holds nearly 120 stocks and tracks the Dow Jones U.S. Health Care Index. The ETF devotes almost 34% of its weight to pharmaceuticals stocks and another 23% to biotechnology names. Healthcare equipment names, one of the best-performing healthcare industry groups this year, are almost 19% of the fund’s weight.
XLV fell nearly 3% last week while the SPDR S&P Biotech ETF (NYSEArca: XBI), one of the largest biotech ETFs, was lower by more than 3%.
“The XLV Health Care ETF plummeted 4 percent this week, battered by news that Amazon, J.P. Morgan and Berkshire Hathaway had partnered to develop an employee insurance program in the years to come,” reports CNBC. “The announcement was seen as a potential disruptor to an industry already dealing with the uncertainties of health-care changes coming from Washington, D.C.”
Industry observers argue that medical technology companies can tap into increased healthcare spending among emerging economies while the U.S. market has matured and could experience slower growth. Looking ahead, in the years through 2024, spending growth is projected to average 5.8% and peak at 6.3% in 2020.
“Investors should re-enter health-care stocks with caution, says Phil Streible, senior market strategist at RJO Futures, as the sector remains vulnerable to market swings,” according to CNBC. “Streible views Tuesday’s low as a key level that the sector should prove resistant to dip below. The Health Care ETF fell to an intraday low of $89.22 on Tuesday before easing off the bottom to end at $89.49. The ETF was down 2.1 percent on Tuesday in its worst one-day loss since October 2016.”
ETF traders who are betting big on the biotechnology sector rebound have also utilized leveraged long options including the Direxion Daily S&P Biotech Bull Shares (NYSEArca: LABU), which takes the 3x or 300% daily performance of the S&P Biotechnology Select Industry Index.
For more information on the healthcare sector, visit our healthcare category.