Buying the right health care ETF as the industry races for a coronavirus cure or vaccine

Published Mon, May 11 20202:42 PM EDT

John Davi, chief investment officer of Astoria Portfolio Advisors

Everyone is wondering what needs to happen for life to get back a sense of normalcy amid the coronavirus pandemic. It's pretty obvious — we need a vaccine and or a treatment. There will be winners and losers in the race for a COVID-19 vaccine and treatment. Just remember that investing in single stocks carries significantly more risk when compared to investing in a diversified portfolio of stocks such as an exchange-traded fund. Here are some ETF options: The Health Care Select Sector SPDR Fund (XLV) is a catch-all way to play the broad health care sector. It's diversified across pharmaceuticals (33%), health care equipment and supplies (25%), and biotechnology (16%). The ETF has $25 billion in assets under management, the largest among all health care ETFs by far. However, buying the largest health care ETF isn't necessarily the best strategy if you are looking to capture a specific theme within the sector. Investors need to focus on valuations, risk characteristics, composition, and the underlying index methodology when evaluating an ETF. The i Shares NASDAQ Biotechnology ETF (IBB) and the SPDR S & P Biotech ETF (XBI) are pure plays for the biotechnology sector. IBB is big, liquid, and is market-cap weighted. Hence, much of the exposures are in the stocks that have benefited in the COVID-19 vaccine and treatment race ( Gilead Sciences, Inc. (GILD) is the second-largest weight of 8%). XBI is more of an equal-weighted approach and sports a 24% reduction in price-earnings ratio compared to IBB, according to ETFAction.com. XBI and IBB have a 45% overlap in holdings. The Invesco Dynamic Pharmaceuticals ETF (PJP) is an attractive way to play the pharmaceutical group. PJP carries a multi-factor approach which historically has performed better compared to a market-cap weighted index. PJP incorporates price momentum, earnings momentum, quality, management action, and value as part of its index construction process. PJP has a lower P-E ratio (15) compared to the VanEck Vectors Pharmaceutical ETF (PPH) (22) and the SPDR S & P Pharmaceuticals ETF (XPH) (23), according to ETFaction.com. PJP has produced higher 10-year compound annual growth rates (CAGR) (14%) compared to the other pharmaceutical ETFs (the iShares U.S. Pharmaceuticals ETF (IHE) (12%), XPH (10%), and PPH (9%)) and has even outperformed the SPDR S & P 500 ETF Trust (SPY) (12%). We are less favorable to IHE because of its high concentration to Johnson & Johnson (JNJ) and Merck & Co., Inc. (MRK) , which make up 37% of the ETF. Tech stocks have led the last decade in the stock market. Life and business have changed dramatically thanks to technology and investors who owned the sector for the past decade have profited. Technology has enabled us to connect with our loved ones as well as work from home during a shelter in place. But without a vaccine and or treatment, it will be impossible for people to resume normal activities. Health Care is crucial for life to get back to normal. Perhaps the sector replaces tech and becomes the market darling in the years to come. John Davi ( https://twitter.com/astoriaadvisors) is founder and chief investment officer of Astoria Portfolio Advisors. ETF holdings shown in this article are for illustrative purposes only and are subject to change at any time. Source for fundamental and return data is ETFaction.com. As of the time of this writing, Astoria held a position in XLV, SPY, JNJ, MRK across a variety of our portfolios, and model delivery services. For full disclosure, please refer to our website: www.astoriaadvisors.com/disclaimer .

Spencer Platt | Getty Images

Everyone is wondering what needs to happen for life to get back a sense of normalcy amid the coronavirus pandemic. It's pretty obvious — we need a vaccine and or a treatment.

There will be winners and losers in the race for a COVID-19 vaccine and treatment. Just remember that investing in single stocks carries significantly more risk when compared to investing in a diversified portfolio of stocks such as an exchange-traded fund.

Here are some ETF options: