Can Healthcare ETFs Stay Hot In 2014? [Health Care SPDR (ETF), Vanguard Health Care ETF, iShares Dow Jones US Healthcare (ETF)]

new etfsSome comforting economic data in the U.S. including solid job reports, which in turn spurred faster tapering, and the apparently calming tensions between Russia and Ukraine once again dulled the demand for safe haven assets this month.

This has pushed the interest rates northward as evident by the rise in yields on 10-year treasury notes to 2.79%. The market last saw this level of interest rates in early February.

On the other hand, if we rule out the recent job data and new home sales data in January, the U.S. was thumped with a slew of soft data in the past two months. Though investors held a severe winter (lowest temperatures in a decade) responsible for such downbeat data points, the overall investing sentiment remains cautiously optimistic. Investors might again be interested in investing in stocks – which are riskier investment avenues than treasury bonds – but with great caution.

This attitude often calls for sector rotation.  The market saw big outflows from industrial ETFs last month while strength was building up in healthcare sector. Let’s dig a little deeper and find out what’s driving this rotation.

Industrials – Out of Favor

Manufacturing data have been on the weaker side to start this year. Though the reading modestly improved in February after a feeble number in January – the slowest pace in eight months and also lower than the median estimate of 56 and the prior-month score of 56.5 – the latest data failed to cheer investors.

Investors are probably looking for some more evidence of continued growth. Notably, the U.S. manufacturing activity in February touched 53.2 bettering the January figure of 51.3 and economists’ expectation of 52.5.

Also, with the interest rates taking an upturn, we expect the sector to slide in the near future.  Investors should note that, industrial production is highly vulnerable to interest rates and consumer demand. The industrial sector is moderately capital intensive and requires borrowings to fund its operation. Higher rates will make the borrowings pricier.

On the other hand, consumer sentiment has also been wavering as optimism over long-term job growth and economic self-sufficiency remains seemingly moderate. Slowdown in the world’s second largest economy as well as many emerging nations should also reduce the demand for U.S. made goods.

Investors might have smelled this weaker trend (at least for the near term) as iShares US Industrials ETF (IYJ) and Industrial Select Sector SPDR Fund(XLI) shed $986.5 million and $256.2 million, respectively, in the last one month (read: Industrial ETFs in Focus on Lukewarm GE Earnings).

Healthcare – the Showstopper

Whatever be the market condition, be it bull or bear, healthcare normally holds up well thanks to its defensive nature. Despite an economic slowdown, people spend on medical usage and the sector stays afloat. To add to this, a big-time driver is in place for the U.S. healthcare industry in 2014 in the form of ‘Obamacare’ or ‘Affordable Care Act’.

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