Healthy Health Care ETF?

Published on Thursday, 09 February 2012 21:46 Written by Todd Shriber

New York, February 9^th (TradersHuddle.com) – As we’ve lamented several times in this space, 2011 was a fine year to be long supposedly boring sector ETFs, including those tracking the consumer staples and utilities spaces. Add health care funds to that list. In an environment that was decidedly risk off, funds such as the Health Care Select Sector SPDR (NYSE: XLV) delivered solid returns. In fact, by the time 2011 came to a close, the Health Care Select Sector SPDR was up 12.4%. Not bad at all.

And as we always say, times do change and has not been the best of news for staples and utilities ETFs. However, XLV has managed to gain over 2% year-to-date. As for as XLV goes, that’s the good news. The bad news is 2% is a far cry from what the S&P 500 has offered investors thus far in 2012.

In the near-term, 2% might be as good as it gets for XLV, at least if investors continue favoring riskier assets and sectors. Some investors have already started to pull cash from XLV perhaps in search of higher beta fare. As of February 9, the ETF had experienced outflows of $173.3 million in just one week.

Maybe we were too abrupt in saying XLV’s good news is limited to its 2% year-to-date gain. State Street Global Advsiors, XLV’s sponsor, recently lowered  expense ratios on all of the Select SPDRs in what can be viewed as the latest noticeable move in the ongoing ETF price wars. XLV was included on that list and now has an expense ratio of 0.18% down from 0.2%. That may not sound like a lot, but over time, it adds up and since XLV is an ideal ETF for a conservative investor with a long-term time horizon the lower fees really do matter.

And when one has a look at XLV’s top-10 holdings, it’s easy to see why this is an ETF you can feel safe recommending to your grandparents. Dow components Johnson & Johnson (NYSE: JNJ), Pfizer (NYSE: PFE) and Merck (NYSE: MRK) account for nearly a third of the ETF’s holdings. Other members of XLV’s top-10 lineup include Abbott Labs (NYSE: ABT), United Health (NYSE: UNH), Bristol Myers (NYSE: BMY) and Amgen (NASDAQ: AMGN).

Give or take a couple of names here and there, that’s basically the same top-10 lineup you’ll find with a comparable health care ETF such as the Market Vectors Pharmaceuticals ETF (NYSE: PPH), but again, XLV is the preferred option because of its low costs.

The technical outlook for XLV is neutral in the near-term. The chart is by no means weak, but the ETF might be best purchased on a pullback, not by those looking to chase momentum.

The vitals: XLV is home to 52 stocks, an expense ratio of 0.18% and $3.9 billion in assets under management. That makes it the second-largest health care fund of any kind and the largest health care ETF.