Health Care ETF Finishes Strong

Over the past 12 months, Invesco S&P 500 Equal Weight Health Care ETF (symbol RYH) gained 25.3%. That lags the broad U.S. stock market, as measured by Standard & Poor’s 500-stock index, which climbed a whopping 31.5%. But it was a much better result for the health fund than we had expected.

The upcoming presidential election has been a source of angst for health care investors. The sector is a magnet for hot-button policy issues and often comes under fire in election years. This time, rhetoric about a Medicare-for-all government-sponsored health plan and legal wrangling about the Affordable Care Act proved to be a double whammy. Over the first nine months of 2019, health care was the worst-performing sector in the S&P 500, up just 5.6%. (Even beleaguered energy stocks fared better.) The S&P 500 rose 20.6% over the same stretch.

Things turned around, however, after Senator Elizabeth Warren unveiled a $20.5 trillion health care plan in November that was “more moderate than the market expected,” says John Frank, an equity strategist at Invesco. In short, Warren said she would tax businesses and the wealthy to pay for the plan, but not the middle class.

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Health care stocks rallied on the news, and over the last three months of the year, the worst-performing sector suddenly became one of S&P 500’s best, with a 14.4% gain—just behind the information technology sector. Stock in UnitedHealth Group (UNH), for instance, jumped 36% in the last quarter of 2019; shares in insurer Centene (CNC) soared 45%; Humana (HUM) climbed 44%. All three are holdings in the Invesco health care ETF.

A balanced approach. As the fund’s name suggests, the 61 stocks in the portfolio get an equal weighting of about 1.6% of the fund’s assets. The process buffers the fund in two ways, says Frank. First, the risk is evenly distributed. Consider: In a market-value-weighted S&P 500 health care index fund, the top 10 holdings would make up more than half the fund’s assets. By contrast, at Invesco S&P 500 Equal Weight Health Care, the top 10 stocks account for just 17% of the fund’s assets.

The second benefit stems from the portfolio’s quarterly rebalance, which Frank says implements a buy-low, sell-high discipline. Last summer, shares in Align Technology (ALGN), which makes the Invisalign dental trays that are fast becoming the orthodontic treatment of choice, fell 37% after disappointing third-quarter guidance, among other issues. The stock slipped from a 1.6% weighting in the fund to just below 1.0%. When the September rebalance occurred, the fund loaded up on Align, which was trading at roughly $180 per share, to bring the stock’s weighting back to par. It was good timing: By the end of December, the stock traded near $280.