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Super Tuesday Results Spark Life To The Largest Health Care ETF

Some votes are still being counted, but one thing is clear: Super Tuesday provided banner results for former U.S. Vice President Joe Biden's hopes of securing the Democratic presidential nomination.

Benzinga · 03/04/2020 18:50

Some votes are still being counted, but one thing is clear: Super Tuesday provided banner results for former U.S. Vice President Joe Biden's hopes of securing the Democratic presidential nomination.

In some prediction markets, Biden's odds have vaulted as high as 85% compared to a meager 10% for rival Sen. Bernie Sanders. Biden bullishness is being reflected in a predictable venue: the health care sector.

In mid-day trading Wednesday, the Health Care Select Sector SPDR (NYSE: XLV), the largest health care exchange traded fund by assets, is higher by 4.4% on volume that has already topped the daily average by a significant margin.

XLV follows the Health Care Select Sector Index, which “seeks to provide precise exposure to companies in the pharmaceuticals; health care equipment and supplies; health care providers and services; biotechnology; life sciences tools and services; and health care technology industries,” according to State Street.

See Also: Biden's Super Tuesday Surge Gives Health Care Stocks A Boost

Why It's Important

Health care, the second-largest sector weight in the S&P 500 behind technology, has a long history of being politically sensitive, underscoring the importance to investors of the Super Tuesday results. XLV offers a compelling valuation scenario, too.

“You'd have to go back to mid-2013 to find the Health Care Select Sector SPDR ETF trading at a significantly cheaper price-to-earnings (P/E) multiple than it does today at 14.6x forward earnings estimates,” according to the ETF Research Center.

ETFRC sees the recent slide in XLV as possibly a case of too much too fast.

“This is quite a discount for a sector that, at the margin, may benefit from increased demand stemming from the coronavirus epidemic, suggesting that the recent sell-off may have been overdone,” according to the research firm.

What's Next

Waning sentiment regarding Sanders being the Democratic nominee is helpful to XLV because the Vermont senator is a Medicare-For-All champion, a thorny issue for XLV because the fund allocates over 7% of its weight to Dow component UnitedHealth (NYSE: UNH) and 19.56% of its total weight to managed care providers.

“Estimates have been stable over the past month, and sell-side analysts' ratings on the companies in the fund have been turning more bullish,” said ETFRC.

The research firm has an Overweight rating on XLV.