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Someone Is Bullish On A Big Healthcare ETF

The Health Care SPDR ETF XLV, the largest healthcare exchange-traded fund by assets, debuted in mid-1998 as one of the original nine sector SPDR ETFs.

Recent Performance

As that pertains to XLV, the healthcare ETF sports an ominous label this year: With 2016 drawing to a close, XLV is the only one of the original nine sector SPDR ETFs that is lower on a year-to-date basis. Following a small loss Monday, XLV is down just over 4 percent this year, putting the ETF in position for its first annual loss since 2008.

Although there have been just three trading sessions in December, XLV is off to an ominous start, closing lower in two of those three sessions. “Ominous” because XLV is, historically, one of the two best-performing SPDRs in December.

Bullish, Despite 'Glum' News

All of that sounds like glum news, but that is not preventing some analysts from waxing bullish on XLV. In a recent note, AltaVista Research tagged XLV with an Overweight rating, the firm's highest rating.

“Typically, funds in this category consist of stocks trading at attractive valuations and/or having above-average fundamentals,” said AltaVista.

Perhaps part of the bullish thesis surrounding XLV and healthcare at large is that election year rhetoric was an albatross on the sector and, obviously, the U.S. presidential election is in investors' rear view mirrors.

Healthcare And Politics

Biotech's laggard status is plaguing diversified healthcare ETFs such as XLV, because those funds often allocate 20 percent or more of their weight to biotech stocks. In most cases, only pharmaceuticals stocks, another group that has not been immune to election year chatter, outweigh biotech in standard healthcare ETFs.

One benefit of biotech's decline is that it has made earnings multiples on the broader healthcare sector more attractive.

“Until the decline in biotech shares dragged the sector's overall P/E down, investors had been revaluing Health Care stocks with steadily higher multiples since late 2011,” said AltaVista. “Perhaps the recent pullback in valuations (P/E, P/BV) reflects the declining trend in Return on Equity. But are investors overreacting? Multiples are at their lowest level in years resulting in the highest rating for any sector, firmly in overweight [emphasis omitted] territory.”

XLV is the only sector SPDR ETF AltaVista has an Overweight rating on.

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