Political bickering aside, the health care sector is a healthy investment

The sector is up 24% this year, leading all S&P subcategories.

The seemingly endless political bickering over health care reform has not dampened investor enthusiasm for the sector, which is leading all stock categories this year, up 24%.
“Health care has been kicking tush, and most of my clients want more of it in their portfolios,” said Theodore Feight, owner of Creative Financial Design.
Mr. Feight, who recently shifted from individual health care stocks to exchange-traded funds to manage volatility better, allocates between 15% and 20% of his client portfolios to the health care sector.
“The basic premise for me and most of my clients is that we’re old, and if you’re going to be old and buying all these drugs, you might as well make money off yourself,” he added.
Mr. Feight primarily gains investment exposure to the health care space through the SPDR S&P Pharmaceuticals ETF (XPH) and Vanguard Health Care ETF (VHT).
As a sector of the S&P 500, health care is the top-performing sector, leading the No. 2 performer, utilities, by 5 percentage points.
Jeff Tjornehoj, an analyst at Lipper Inc., attributed the sector’s performance to the biotechnology subsector, which has experienced a number of high-dollar mergers this year.
“We usually think of health care as a defensive sector, like financial services and utilities, but the performance has really been driven by a lot of biotech hookups this year,” he said.
The biotech subsector has gained 34% this year, followed by a 31% gain for managed health care company stocks. Pharmaceutical sector stocks are also up 31% from the start of the year.
“Most of your health care funds are going to have a sizable chunk of biotech and pharmaceutical stocks in them,” said Todd Rosenbluth, director of mutual fund research at S&P Capital IQ.
He attributes part of the health care sector’s performance to the Affordable Care Act, which has been the subject of heated and ongoing political debate.
“We’re seeing the benefits of health care reform in health care sector stocks,” Mr. Rosenbluth said. “This has certainly taken on a much greater political angle than most things in the investment world, but the facts are that there are fewer uninsured people now than there were before the Affordable Care Act.”
Mutual funds tracked by Morningstar Inc. in the health care category have produced an average gain this year of 27%. The category has a 12-month-trailing return of 31%, and a three-year average return of 32.5%.
Even after the recent run of solid performance for the category, S&P Capital IQ is maintaining its bullish outlook for the health care sector.
With Republicans now in control of both houses of Congress, it’s safe to assume the debate over Obamacare will continue. But that’s not a reason to move away from the health care sector investments, according to Mr. Rosenbluth.
“We continue to like a number of the health care stocks that are populating a lot of mutual funds,” he said.
Among the names Mr. Rosenbluth said will represent major allocations in most active health care funds are Johnson & Johnson (JNJ), Pfizer Inc. (PFE), Gilead Sciences Inc. (GILD), Celgene Corp. (CELG), Aetna Inc. (AET) and Cigna Corp. (CI).
He cited the Health Care Select Sector SPDR ETF (XLV) as a means of gaining concentrated exposure to many of the industry leaders. The ETF has a 44% weight in pharmaceutical stocks and a 22% weight in biotech names. It also has a 12% weighting in Johnson & Johnson.
Mr. Rosenbluth recommended the Vanguard Health Care ETF (VHT) for more exposure to smaller-cap stocks in the health care space.
“Even though the health care sector had a good 2014, we think it’s still undervalued,” he added.