One Way to Play the Health Care Trend

Popular misconceptions are often the root of profitable opportunities. That is, for those willing to take the other side of the commonly-held argument.

The health care sector is one example of this.

Ever since the Obamacare idea was first introduced, many investors have been in a state of paralysis. That’s quite understandable. After all, we don’t know if the law will stand, we don’t know exactly how it will be implemented, and we certainly don’t know yet what effect it will have on the myriad of stakeholders, some of whom are sure to benefit from the law while others will likely suffer.

I suspect, with so many pivotal unknowns, that many retail investors have shied away from investing in the health care space. And that could be a big mistake, in the form of lost opportunities, because the health care sector is outpacing every other sector in the market this year.

Here’s a chart of the nine sector ETFs (SPDRs), along with the S&P 500 (SPY, in bold white) as a reference point. The chart shows percentage gains for each sector since the start of this year.

See larger image

I’ve highlighted the health care sector (XLV) in bold red. As you can see, it’s been the market leader pretty much all year.

And that brings me to another potentially costly misconception about health care stocks: that they’re a defensive play.

Some investors cite the fact that many health care stocks are low beta, meaning they’re less volatile than average. They also point out that stocks in the health care sector fared better than those in many other sectors in the downturn between 2007 and 2009.

But when I dug beneath the surface of these assumptions I found a more interesting trend. Between 2000 and 2010, the health care sector outperformed the broad market in 2001, 2002 and 2008. Yet these were negative years for the broad market, so the health care sector’s outperformance was the “less severe fall” variety. This highlights the defensive nature of the sector.

But then a shift occurred. In 2011, 2012 and 2013 (so far) the health care sector has outperformed the broad market while the broad market was having a positive year. This observation seems to debunk the myth that health care stocks are only good as a defensive play. As we’ve seen, since 2011, health care stocks can also provide portfolio-juicing, market-beating returns in strong bull markets.

I think we can attribute a lot of this change in the health care sector to rising demand for services, mainly from the Baby Boomer generation. And if that’s the case, the health care sector’s strong outperformance should last for many more years, as these Boomers march up the age ladder.

Of course, if you’re worried about Obamacare, and uncertain which type of health care stocks to buy – insurers, hospitals, device makers, etc. – then investing in a basket of stocks, via an ETF like the SPDR Health Care Select EFT (NYSE: XLV), is a great way to gain exposure to the sector, while staying diversified.

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Categories: Markets

About Author

Adam O'Dell has one purpose in mind: to find and bring to subscribers investment opportunities that return the maximum profit with the minimum risk. Adam has worked as a Prop Trader for a spot Forex firm. While there, he learned the fundamentals of trading in the world’s largest market. He excelled at trading the volatile currency markets by seeking out low-risk entry points for trades with high profit potential. An MBA graduate and Affiliate Member of the Market Technicians Association, Adam is a lifelong student of the markets. He is editor of our hugely successful trading service, Cycle 9 Alert.