Broadly speaking, the healthcare sector isn’t on fire this year, but analysts are increasingly bullish on the group, citing attractive quality and valuation traits, among other factors.
While the sector isn’t yet ablaze in 2022, some big names in the group are delivering for investors, underscoring the point that quality is a virtue. On that note, some healthcare exchange traded funds have more significant exposure to high-flying names than others. That group includes the First Trust Health Care AlphaDEX Fund (FXH ).
FXH follows the StrataQuant® Health Care Index, which is a departure from the typical healthcare equity gauge. That could serve investors well in the current market setting.
“As inflation surges, geopolitical tensions mount, and the Fed begins to start a new cycle of interest rate increases, investors have begun to move back into healthcare stocks that are often seen as a haven during tough economic times. As a result, AbbVie (ABBV), AmerisourceBergen (ABC), Anthem (ANTM), and UnitedHealth Group (UNH) have all jumped back to record highs even though, as a group, they still trade at valuations below the S&P 500 Index,” according to Barchart.com.
In order, AbbVie, UnitedHealth, and Anthem combine for over 6% of the FXH roster. What makes the FXH methodology unique is that its underlying index employs both growth and value factors in its stock selection process. The implementation of a value overlay is highly relevant at a time when many analysts view healthcare as a credible value destination.
As just one example, Goldman Sachs sees attractive valuations in the sector and sees biotech and pharmaceuticals names as under-owned by professional investors.
The bank “sees room for the large-cap drugmakers to move higher toward their historical discount to the S&P 500 as investors move into discounted stocks like AbbVie, Bristol-Myers Squibb (BMY) and Merck (MRK),” adds Barchart.
Dow component Merck accounts for nearly 1% of the FXH portfolio. Owing to lethargy in the biotech space, small-cap healthcare names are trailing their large-cap counterparts on a year-to-date basis. As a result, it’s common for many sell-side analysts to extol the virtues of embracing larger healthcare stocks. The $1.46 billion FXH obliges, as the median market capitalization of the First Trust fund’s 85 holdings is $20.58 billion, according to issuer data.
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