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Healthcare ETFs Lag the Broader Market Amidst Regulation Scare

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Once an outperformer last, providing investors a defensive play in 2018, the healthcare sector and related ETFs are now among the worst off in 2019 as the threat of regulations weigh on this market segment.

The Health Care Select Sector SPDR ETF (NYSEArca: XLV) reflects one of the poorest performers this year, advancing 4.2% year-to-date, compared to the 16.7% rise in the S&P 500. The performance in this sector marks a stark contrast to last summer when health companies led the markets.

However, the threat of tightening health-care regulations has pressured the healthcare sector this year, the Wall Street Journal reports.

Furthermore, an earnings scare from Walgreens Boots Alliance, which cut its annual earnings forest amid a profit squeeze related to rebates from makers of generic drugs, along with CVS Health Corp.’s similar warnings in February, fueled concerns of potentially further weakness in the earnings season ahead. Health-care giant Johnson & Johnson and UnitedHealth Group, the parent of the country’s largest health insurer, are up to bat to release first quarter results on Tuesday.

“Investors are scared about the massive amount of uncertainty in terms of regulation,” Brock Moseley, founder of Miracle Mile Advisors, told the WSJ. “There’s a critical eye around the health-care space and drug pricing. These challenging trends do give us some worry.”

The healthcare sector, though, remains a brighter spot in the earnings landscape. Health-related companies are expected to report the second highest profit growth of the benchmark S&P 500’s 11 sectors for the first quarter, rising 4% year-over-year, according to FactSet.

Investors have been in healthcare stocks for the sector’s growth and defensive characteristics, providing investors with yields and valuations that are less stretched than other yield-producing stocks like utilities.

“We think of health care as an all-weather sector that can do well no matter what the economy is doing,” Michael Sheldon, chief investment officer at RDM Financial Group at HighTower, told the WSJ. “In the past, any talk that Washington may institute new legislation has turned out to be a relatively short-term headwind for the health-care sector.”

For more information on the healthcare segment, visit our healthcare category.

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