The healthcare sector is in the red this year, but its defensive traits are helping the group sharply outperform the broader market.
That could be an encouraging sign for healthcare exchange traded funds, including the IQ Healthy Hearts ETF (HART ). Additionally, 2022 has been anything but sanguine, and as a result, many investors are embracing defensive sectors, including healthcare.
Adding to that defensive posture is that many healthcare stocks, including some HART member firms, are wide moat firms, meaning they have deep competitive advantages.
“We believe the defensive nature and relative safety of healthcare stocks are supporting the minor outperformance. For the most part, we expect our healthcare coverage (especially firms with moats) will be able to pass along price increases due to any inflationary pressures given the strong pricing power enjoyed by the sector due to patents and high switching costs,” notes Morningstar analyst Damien Conover.
Recently, investors expressed concern about the pharmaceutical pricing provisions contained in the Inflation Reduction Act, but those stipulations only pertain to Medicare recipients, and the number of drugs in the plan is pretty limited. Translation: Those concerns may be overblown as they pertain to healthcare stocks and ETFs like HART.
“Finally, in a surprising move, the U.S. Congress passed new drug policies as part of the Inflation Reduction Act that will have global implications, as the U.S. drug market represents close to half of the global market. However, we view the new price controls and reimbursement changes in Medicare as a manageable negative headwind for the biopharma group,” adds Conover.
The HART thesis is further supported by compelling multiples in the healthcare sector, which are made all the more notable when accounting for the group’s storied history of sporting alluring quality traits. Those characteristics are beneficial in turbulent market environments.
“We view the healthcare sector as modestly undervalued. Our sector coverage trades below our overall estimate of intrinsic value at a price-to-fair value of 0.94. We see just over 50 ‘buys’ in the sector, with over half of our coverage rated 4 or 5 stars,” concludes Conover.
Another benefit, and it’s one that enhances, not detracts from, quality/value proposition, is the fund’s exposure to other sectors. Those include communication and technology, which are home to plenty of quality stocks currently sporting interesting valuations.
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