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Health Care: A Sector Outperformer, But I’m Not Buying

The markets recent volatility has shifted investor focus into defensive positions, and as a defensive play, the health care sector has benefited. Health care has beaten all other sectors with a year-to-date gain of 15.3% (the second best performer being utilities, up 11% year-to-date…and the worst being financials, with a .3% gain).

And health care ETFs have outperformed other sector funds. According to Standard & Poor’s, “among the top year-to-date ETF performers, we see a heavy concentration in health care”, with 14 of the 16 strongest ETFs focused on the over-all sector.

The Health Care Select Sector SPDR (XLV), the largest sector fund with over $4 billion in assets, is up 14% year-to-date (and up over 28% in the past year). The fund holds the 52 health care companies in the S&P 500 (something like 90% of holdings had upside surprises in the recent earnings season). The fund is in a long-term positive trend, and has, technically, been a long-term buy since last September…but I’m not a long-term buyer.

My concerns: the fund is moving towards an overbought range (at which point we could see a correction). And again, the sectors recent gains have, in part, been driven by a focus on defensive positions. When we see risk return to the table, defensive stocks will have less appeal.

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