Coronavirus Sparked Healthcare ETFs In General, But Ultimately, We Really Do Need To Pick And Choose

  • We see it much more boldly when switching our focus to company-centric fundamental-value, earnings-growth, sentiment and technical-analysis metrics
  • But Healthcare is not a monolith. 
  • After Coronavirus pounded pretty-much everything in the market, the recent upturn propelled Healthcare conspicuously to the forefront.
  • We can see this in the place we’d be inclined to look — in price charts.
  • There are opportunities to pick and choose, my favorites being XLV, FBT and XVI.

When Mr. Market succumbed to Coronavirus after February 19, everything seemed to collapse in unison. In reality, some sectors fell a bit harder while others were a bit less bad, but on the whole, everybody who had money in stocks felt ill. When it comes to the snapback (or bear-market rally) we’ve enjoyed since March 23, we’ve been seeing some meaningful separation. The SPDR S&P 500 ETF (SPY) bounced 23%. But coronavirus-induced expectations of future profitability sent the SPDR Select Sector Healthcare ETF (XLV) up 31%, bringing it to within 7% of its pre-crash high. But Healthcare ETFs were not created equally, so it’s time to look under the hood and fine tune portfolio exposure to this sector.

© Can Stock Photo / Yakobchuk


General out-performance relative to the market can be seen in any number of ways. Figure 1 charts the ETF’s performance (the red line) over the past three adventure-filled months relative to SPY matched up with trends in the the PortfolioWise Power Rating (the horizontal bar running along the bottom of the chart that’s been alternating between green and yellow as the rating shifts between bullish and neutral), and the mountain graph below that which charts the Chaikin Relative Strength indicator.

Figure 1  

The significance of the liftoff looks much bolder, however, if we factor in company-specific  metrics. We do this by analyzing how the stocks held in an ETF portfolio fare under our 20-factor Power Gaugetechnamental” rating model, which is an important component of our US Equity ETF Power Ranks

Figure 2 shows the current PortfolioWise Sector Rating Grid, which provides a visual comparison of S&P 500 and Sector Select ETFs, and incorporates the aforementioned company-specific metrics.

Figure 2

For most of the coronavirus season, the ETFs lined up like a vertical pole planted right in the center of the grid’s horizontal axis, the neutral position, with Select Sector Energy ETF (XLE) being the lone outlier mired on the lower left (bearish) side of grid; XLE was joined in bear country just this week by the Select Industrial ETF (XLI). But what had become a pattern of neutral-to-negative dreariness was, on April 14, boldly broken when the Select Sector Healthcare ETF (XLV) separated from the pack by jumping to the right (bullish) edge.

Figure 3 uses Chaikin Industry “Power Bars” — the ratios of bullishly (green) to neutrally (yellow) to bearishly (red) ranked stocks in the group — to provide another perspective.

Figure 3

Considering all industries in the market, four among the top seven industries (out of the 64 we could see if we were to scroll down), are part of the Healthcare sector: Biotechnology, Healthcare Technology, Life Sciences Tools and Services, and Pharmaceuticals. The other industries within the healthcare sector (Healthcare Equipment and Healthcare Providers) come in at numbers 11 and 17 respectfully. While we have concluded that the healthcare sector is a strong place to look, XLV is not the only option.

Searching for Healthcare Ideas Beyond XLV

I screened on PortfolioWise for Healthcare ETFs rated Very Bullish with 1 month relative (to SPY) performance no worse than minus 5% (yes, I tolerate a bit of lagging; screeners who get too picky, especially during times like these, wind up with weak result sets). I also eliminated ETFs whose metrics were at the low end of the spectrum in terms of trading volume, trading liquidity and assets under management (AUM).

Tables 1a and 1b provide basic information of the ETFs that passed the screen, and also on the SPDR S&P Biotech ETF (XBI), which I manually added, despite its “mere” Bullish rating, because of its large size and market stature. The Tables are sorted from Highest down by Group Rank (which compares ETFs in the same group based on raw 0-100 Chaikin Power Rank scores). 

Table 1a

Table 1b

Tie-Breakers: Choosing From Among The Candidates

The top-ranked ETF, the sector flagship, is obviously a reasonable choice, and judging from AUM, volume and liquidity, many investors agree. But the various data points relating to past price performance cue that other Very Bullish ETFs also deserve consideration, as does XBI.

I decided to take a closer look at portfolio composition by drilling down below the sector level to sub-industry, the finest level of categorization within the Healthcare sector to see if there were a different and more nuanced categorization method worthy of consideration. This information is shown in Tables 2a and 2b. 

Table 2a

Table 2b

We can now see there are four types of Healthcare ETFs from which we can choose: (1) Broadly Diversified, (2) Pharma-oriented, (3) Services-oriented, and (4) Biotech-oriented.

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