Biotechnology Gets A Shot In the Arm – Focus on Funds – Barrons.com – Barron’s (blog)

By Crystal Kim

The healthcare sector has been doing rather well, gaining 8.9% year-to-date. Behind just information technology, healthcare stocks have outpaced Trump sectors including materials, industrials, and financials so far,suggesting that investors may be getting defensiveand they arent alone.

Credit Suisse upgraded its rating on pharmaceuticals/biotechnology to Overweight from Market Weight on Tuesday. That said the Health Care Select Sector SPDR (XLV) is down 0.21% as of Tuesday afternoon.

Broad market valuations and heightened risk for a short-term correction led Chief U.S. Equity Strategist Lori Calvasina to boost defensive exposure. Whats not to like valuations are slightly more attractive in the large-cap space and reasonable in small-cap, earnings momentum is so low that it could go only go up, flows are signaling a turnaround, and there are virtually no concerns about so-called crowding risk. She notes:

In large cap, net buy ratings, mutual fund overweights, and hedge fund net exposure have all been slipping from the high end of their historical range. In small cap, our sell-side indicator is also elevated, while our mutual fund indicator is moving up, and our hedge fund indicator is falling toward past lows. Importantly, sell-side ratings have shown a significant correlation with relative performance in both small and large cap.

There are many ways to play this trade. On the pharmaceuticals side, big exchange-traded funds iShares US Pharmaceuticals (IHE), PowerShares Dynamic Pharmaceuticals (PJP), and VanEck Vectors Pharmaceutical (PPH) deserve a look. All three are fairly concentrated; the iShares ETF tracks an index of 40 stocks while the PowerShares and VanEck ETFs follow an index of 25 stocks. Still mega-cap Johnson & Johnson (JNJ) is a substantial holding in all three.

However, biotechnology ETFs might be the better bet. Calvasina says that its healthcare industry scorecard suggests that biotech and life sciences stocks are the source of the broader industry groups valuation appeal.

ConsideriShares Nasdaq Biotechnology (IBB) and the SPDR S&P Biotech (XBI). IBB has a bigger swath of the sector with 162 constituents in the index that it tracks, while XBI has 87. IBBs top holdings are inlarge-caps such as Celgene (CELG) and Gilead Sciences (GILD) whereas XBI tends to be invested in small-caps. Being in the large-cap space worked in IBBs favor today. It is down 1.61% compared to XBIs 3.23% decline. Note however that the iShares ETF charges a higher fee of 0.47%. XBI charges 0.35%.

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Biotechnology Gets A Shot In the Arm - Focus on Funds - Barrons.com - Barron's (blog)