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What Drives Sector ETFs?

Health care remains one of the preferred sectors for S&P Capital IQ, despite scrutiny about high drug prices and ongoing concerns about the Affordable Care Act. Year to date through November, the S&P 500 health care index rose 4.3%, ahead of the 1.0% for the S&P 500 index, despite losing ground for the month. We see strong fundamentals and appealing valuations relative to the broader market.

S&P Capital IQ sees a number of catalysts for the sector, including solid sales growth as he thinks the sector's fundamentals remain intact along with significant drug developments over the past several years and his view of robust drug pipelines. According to Capital IQ consensus forecasts, the health care sector should generate 7.8% earnings growth in 2016, with an acceleration occurring in the second half of the year.

Besides being a strong performer this year, the health care sector was popular with investors adding $7.7 billion of fresh money to the style. There are 27 ETFs covered by S&P Capital focused on the sector and their exposures to various industries and stocks are different. S&P Capital IQ rankings are driven by a combination of holdings-level analysis and ETF-level attributes.

For example, Health Care Select Sector SPDR (XLV) recently had a 39% weighting to pharmaceuticals and 24% to biotechnology. Aided by a hefty 10.4% weighting in low-risk Johnson & Johnson (JNJ), XLV has a standard deviation of 11.9.

Meanwhile SPDR S&P Biotech (XBI) is equally weighted and, as such, has more exposure to smaller-sized companies. Indeed, Myriad Genetics (MYGN) and Radius Health (RDUS 57 NR), with market capitalizations of about $3 billion, were weighted similarly to much-larger cap names like Amgen (AMGN) and Celgene (CELG).

Learn more about the drivers S&P Capital IQ sees for these and other sector ETFs, tied to consumer discretionary and financials, through this video.

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