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3 Healthcare ETFs Holding up in Face of Broader Market Weakness

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Broadly speaking, times are hard for equity investors. Rising interest rates and soaring inflation are proving to be a toxic brew for stocks – a scenario worsened by increasing talk of a recession.

Following a 1.48% loss on Thursday, the S&P 500 is lower by more than 6% year-to-date. Fortunately, there are pockets of strength, particularly among defensive, lower volatility sectors. Healthcare is part of that group.

To be sure, healthcare – the S&P 500’s second-largest sector weight behind technology – isn’t setting the market ablaze this year. The S&P 500 Health Care Index is basically flat on the year while some of the growth corners of the sector are slumping mightily.

On the other hands, tumbling healthcare growth stocks are creating valuation opportunities and when examining the sector from a broader perspective, it remains alluring on the basis that it possesses inflation-fighting credibility by way of pricing power and dividend growth, quality balance sheets and perhaps some durability should a recession come to pass.

With that in mind, here are some healthcare ETFs that could be worth considering.

1. First Trust Nasdaq Lux Digital Health Solutions ETF (EKG)

The First Trust Nasdaq Lux Digital Health Solutions ETF (EKG) is a new kid on the healthcare ETF block as it debuted a month ago. It can be argued that a better time to have launched a digital healthcare ETF would have been two years ago when this concept was hot due to the coronavirus pandemic.

However, that line of thinking misses the mark that digital health was growing before the pandemic and that this form of doctor/patient interaction isn’t dependent on a crisis for growth. Indeed, EKG offers ample avenues for long-term growth.

“Transformative shifts within health care are creating opportunities for companies that embrace innovation in technological and medical advances,” notes First Trust. “Personalized, real-time analytics delivered from a wearable device, the use of artificial intelligence, virtual reality and augmented reality during surgical procedures, developments in genomic sequencing—these are just a few of the breakthroughs brought about by innovations in digital health.”

2. Invesco S&P 500 Equal Weight Health Care ETF (RYH)

The Invesco S&P 500 Equal Weight Health Care ETF (RYHis a sound idea for investors looking to reduce concentration risk in the healthcare sector. As is the case with many tech funds, cap-weighted healthcare ETFs can be somewhat top heavy, which can subject investors to undue single-stock risk.

RYH significantly eases that burden because none of its 66 holdings exceed weights of 1.8%. Additionally, equal-weight ETFs often lean more into the value factor – a relevant point with RYH because there is some value to be had in healthcare today.

“We continue to view the valuation in the sector as split between a general undervaluation in the larger biopharma group and an overvaluation in the device and diagnostics industries,” says Morningstar analyst Damien Conover. “While the biopharma valuations imply a high degree of risk involving potential changes in U.S. healthcare policies targeting drug prices, we see this threat as fading, especially as other priorities increase in the U.S. Further, the fundamental outlook for biopharma firms remains strong, with low patent exposure and several new innovative drugs launching and gaining market share.”

3. ARK Genomic Revolution ETF (ARKG)

Few healthcare ETFs are as badly battered as the ARK Genomic Revolution ETF (ARKG). The actively managed fund is off 56% over the past year. Rising interest rates are a primary culprit here because ARKG is a growth-centric fund and as 2022 broader growth equity performance confirms, growth stocks are vulnerable to Federal Reserve tightening.

On the other hand, some market observers may argue that genomics equity declines are too severe, indicating there may opportunity with ARKG for risk-tolerant investors. Likewise, some analysts are bullish on the healthcare ETF’s biggest holding – Teladoc (TDOC).

“We think healthcare access is moving more toward digital interactions, and TDOC’s broad suite of services addresses more touchpoints than any other provider, in our view. While COVID created a short-term upswing in awareness and utilization, we think it also accelerated the longer-term shift to broad-based adoption,” said Guggenheim analyst Sandy Draper in a recent note to clients.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.



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