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Summary The health care sector went through a significant meltdown during the recent weeks. A long term investor might consider it as an opportunity to invest in great companies. Here is a list of 4 non-expensive ETFs that are focused on the Health Care sector. Three weeks ago a good friend of mine bought shares of Mylan Inc (NASDAQ: MYL ). His goal was to invest in a defensive stock in order to mitigate the volatile market. Since the day he made the purchase the stock was hammered down and closed is currently at a total of ~20% lower. Mylan is a global generic and specialty pharmaceuticals company that is registered in the Netherlands. In 2007, following a big acquisition Mylan became the second-largest generic and pharmaceuticals’ company in the United States. It was a wise decision at the time. Here is Mylan’s forecast P/E growth rates in the coming years based on Nasdaq.com. A P/E of 8x for a double digit growth company is not too bad at all. MYL’s stock price free fall was no different compared to other Health care companies’ stocks. If looking at the behavior of the S&P 500 Health Care Sector the graph tells us that there was about 20% drop in the sector since the recent highs. On Wednesday, September 30th, there seemed to be some recovery after several bloody weeks. (click to enlarge) The drop is explained by Hillary Clinton’s ” price gouging ” tweet which led to concerns within the investors’ community regarding higher regulations on drug pricing. Is this massive drop justified or is it an out-of-panic oversell and therefore a great opportunity? Why do I think it is an oversell? Several reasons lead me to believe it is an extreme reaction over nothing and it is a temporary meltdown: The market is very volatile in the recent weeks and it seems that the focus is only on the bad news that are being a catalyst towards a dipper correction. Back in August it was the less-than-expected growth in China’s economy, than it was the Volkswagen ( OTCQX:VLKAY ) scandal and now it is this tweet. Any regulation would need to pass Congress where the Republicans still have the major votes. It would be at least couple of years until something would really change. Not all companies are taking outrages profits on their developed drugs. The amount of Research and Development the companies are investing is huge and therefore the economy of the business will eventually dictate the prices. It will not be the politicians. The sector is composed from different types of companies. Some develop an original medicine or drug and there are generic drug companies. Some are focused on specific niches and others have huge diversification. Even if there will be new regulations not all will suffer equally. Some would even benefit from it. For those, like me, who think that it is the later here are some ETFs that invest in this sector and should be profoundly examined by the long term investor. Why an ETF and not specific stock picking? While both the uncertainty and the volatility are high an investment in a specific sector can be better managed through an ETF. In cases where an investor would like to build a position that is composed by wide list of holdings, sometimes in several steps, an ETF would be a better way to do it. Buying into a sector’s ETF allows to build a position in a by-step model. Another reason to prefer an ETF is the level of familiarity with the list of companies in the sector. Though all the sector’s companies were hurt by the recent selloff most of the investors will not know which of the companies are best to recover and which could be impacted by new regulations (in case it is not just a hot balloon towards election). An ETF allows to have a wide exposure and by that increase the probability to ride the right companies towards recovery. When looking at the list of Health care ETFs I found a list of 38 ETFs. The full list can be found here . Some of the ETFs are focused on the traditional big health care companies like Johnson & Johnson (NYSE: JNJ ), Gilead (NASDAQ: GILD ) and Pfizer (NYSE: PFE ). Others are focused on biotechnology companies like BioMarin Pharmaceutical Inc. (NASDAQ: BMRN ) and Biogen Inc. (NASDAQ: BIIB ). Some are focused on health care equipment companies and some in small biotech small startups. An investor can decide based on his or her risk profile the best ETF that suits his or her needs based on its mix and focus. Filtering the list As I like to start a list filtering by eliminating ETF that charge high management fees I have sorted out all ETFs that charge more that 0.3% per year. Surprisingly I was left with only four ETFs. (click to enlarge) The last four are: The Health Care Select Sect SPDR ETF (NYSEARCA: XLV ), which replicates Health Care Select Sector Index. The Vanguard Health Care ETF (NYSEARCA: VHT ), which replicates MSCI US Investable Market Health Care 25/50 Index. The Fidelity MSCI Health Care Index ETF (NYSEARCA: FHLC ) that replicates MSCI USA IMI Health Care Index. The PowerShares S&P SmallCap Health Care Portfolio ETF (NASDAQ: PSCH ) which replicate S&P SmallCap 600 Health Care Index. This list allows an investor to pick an inexpensive ETF based on his or her own risk tolerance. A quick comparison between the four: In term of performance, PSCH delivered the highest return in the last five years due to its more risky nature. Surprisingly it wasn’t harmed harder than the others during the recent month drop. Both XLV and VHT are tending towards the large cap health care companies. XLV seems to be more conservative as it shown by its average 18x P/E ratio versus the average of 32x. VHT has a significantly higher amount of holdings which are mostly small and medium cap companies that are trading at higher P/Es compared to the JNJs and PFEs. Conclusions: The list of four non-expensive ETFs can be examined by a long term investor who believes that the Health Care sector’s meltdown is only a temporary one. In term of the potential of long term gains, some would prefer the small cap ETF, PSCH. If looking for high diversification, VHT seems to be the best one. I picked XLV in term of risk/return tradeoff. I prefer an exposure to the big and strong companies of the sector. In any case, I suggest to plan a strategy of building a position in multiple steps. The volatility is still here and the correction can be dipper than anyone anticipates. Happy investing. Scalper1 News
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