Focus on Health

11/19/2014 9:00 am EST

Focus: ETFs

Healthcare stocks are often recommended as defensive holdings for bear markets on the premise that no matter what happens, people will always have to eat, drink, and take their medicine, explains Sy Harding, editor of Street Smart Report.

However, the sector has been much more than a defensive holding. It has handily outperformed the S&P 500 (SPX). That can be seen in the performance of the SPDR Healthcare ETF (XLV), which we recommend in our model portfolio.

XLV is a ‘passive’ (unmanaged) index fund, with a low annual net expense ratio of only 0.16%. Its ten largest holdings are Johnson & Johnson, Pfizer, Merck, Gilead Sciences, Amgen, Abbvie, Bristol Myers Squibb, UnitedHealth Group, Biogen, and Celgene.

Prior to the passage of the Affordable Care Act, predictions were at both extremes regarding the effect its passage would have on the healthcare sector.

But with more than 11 million previously uninsured people now insured under the Act, it does look like the Affordable Care Act was more of a positive than a negative for the industry.

Meanwhile, healthcare has been a significant growth industry long before the Affordable Care Act became an issue and that has not changed.

There are concerns now being expressed in some quarters that, with the Republican Party taking control of both the House and Senate, significant changes are coming for Obamacare.

That may be. However, it is doubtful Congress will make significant changes that take healthcare coverage away from the millions of people who are now covered. Rather, any near-term changes would more likely involve lessening the burden on corporations.

While the healthcare sector may pull back short-term on the political concerns, such a pullback is likely to be another buying opportunity for a sector that has so consistently outperformed the S&P 500.

Further, the sector has the added attraction of being considered a defensive sector in the event of a market downturn. The XLV ETF declined 40% in the 2007-2009 meltdown while the S&P 500 declined 57%.

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