The healthcare sector, the third largest sector weight in the S&P 500, is roaring back to life this year. The primary drivers of the group’s resurgence include healthcare equipment makers. For example, the SPDR S&P Health Care Equipment ETF (XHE) is up more than 13 percent this year and hit an all-time high on Monday.
Even before these 2017 gains, XHE was one of 2016’s best-performing healthcare exchange-traded funds (ETFs). Last year, XHE jumped nearly 12 percent even as the broader healthcare sector stumbled to its first negative performance on an annual basis since 2009. XHE, which debuted over six years ago, tracks the Health Care Equipment Select Industry Index. That index offers an equal-weight view of healthcare equipment makers and providers of healthcare supplies. (See also: The SPDR S&P Health Care Equipment ETF.)
As is the case with the broader healthcare space, aging populations are viewed as an important catalyst to the long-term fortunes of healthcare equipment stocks and ETFs such as XHE. “Aging populations worldwide, coupled with extended life expectancy, create a sustainable demand for medical devices,” according to the International Trade Administration. “As elderly populations’ healthcare is frequently government-subsidized in markets around the world, home healthcare is also becoming of increased importance, as related technologies become more effective, and healthcare budgets are more closely scrutinized.” (See also: 4 Global Economic Issues of an Aging Population.)
Medical device manufacturers and equipment makers, including many of the nearly 70 companies found in XHE, are benefiting from speculation that the Republican-controlled Congress will work to repeal an industry-specific tax that is a relic of the Affordable Care Act (ACA). The tax on medical device makers led to some job cuts since the ACA was passed, which perhaps prompted the tax’s temporary suspension late in President Obama’s second term. Industry observers widely expect the Trump Administration to make permanent that tax suspension.
There are other macro factors to consider with XHE as well, namely the performance of the U.S. dollar. The U.S. is one of the dominant providers of world-class medical devices and equipment, and companies found in XHE generate significant portions of their sales overseas. Top export destinations for U.S. medical equipment include the Eurozone, Japan, the U.K., China and Australia, among others. Said plainly, a weaker dollar stands to benefit XHE, so it is not entirely surprising that the ETF is surging this year while the U.S. dollar is viewed as a disappointment among major currencies.
“Despite uncertain economic conditions in key markets around the world, large and small players in the U.S. medical device industry show adaptability and tenacity, and companies are optimistic about the future,” said the International Trade Administration. (See also: Top 3 Healthcare ETFs for 2017.)
A Healthy Healthcare ETF (XHE)