The Healthcare SPDR (XLV) is an exchange-traded fund that represents an interest in a diversified basket of pharmaceutical stocks, healthcare providers and medical equipment manufacturers. Because the healthcare industry is not very cyclical in nature, the fund usually acts as a good defensive play when the overall market runs into trouble.

The Healthcare SPDR (XLV) ranks pretty much at the bottom of the barrel since the stock market started moving higher in late 2002. It has done little to engender support from investors. 

Pharmaceutical stocks comprise nearly 60% of the fund, while healthcare providers and medical equipment manufacturers and suppliers both garner around 16%. Biotech is a mere 8%, with more than half of that coming from Amgen (AMGN). Pfizer (PFE) and Johnson and Johnson (JNJ) account for 18% and 12% respectively with Merck (MRK) making up an additional 7%. 

Healthcare issues are said to be defensive – they should out perform in a down market. This is partially because people need to buy prescriptions, medical equipment and healthcare services regardless of the direction of the economy. Also, remember that the dollar often falls when the U.S. economy weakens. Pharmaceutical companies earn a large portion of their revenue from overseas. When the dollar falls, they can then translate their foreign revenue into more dollars.

Unfortunately, the pharmaceutical companies have been running into ever more restrictive formularies in the U.S. and abroad. Insurance companies fight tooth and nail against paying for brand name prescriptions. Ever-higher co-pays on insurance have led consumers to jettison the name brands even when insurance companies will reimburse. This has helped place the Healthcare SPDR, and its cousin, the Pharmaceutical HOLDR (PPH) into secular (very long-term) bear markets.

What is absolutely frightening is that virtually every place I look, I see analysts recommending purchase of healthcare oriented shares. Even with this, XLV is under performing the market. Overall, this fund has barely moved in recent years, and shows no signs of exploding higher. Although a real recession may see XLV outperform the S&P 500, and almost certainly the technology sector, I do not see it turning in a positive performance either.

Note: XLV became a healthcare oriented fund only as of June 24, 2002. Prior to that time, XLV was known as the Consumer Select Services SPDR. Therefore, chart information from before June 24, 2002 is not relevant and cannot be considered reliable in forming an opinion on XLV's future performance.

HOW TO MAKE MONEY IN XLV THIS YEAR
XLV has consistently traded weaker than just about any other equity oriented fund since the stock market bottomed in October 2002 (its low was set in September 2001 following the 9/11 attack). Although XLV hit its low long before the broad market, its gains have been far less than the increase in the overall S&P 500. Healthcare stocks (pharmaceuticals in particular) have been hurt by poor pipelines of new prescription medicines (pipeline is jargon for drugs under development that can be expected to become profitable). Furthermore, continued concern over healthcare and prescription drug costs means that this sector is probably in a secular (very long term) bear market. 

A quick look at the chart shows that the up trend line from October 2002 is under attack. Furthermore, the 50-week moving average appears set to give way as well. I suspect the former can hold for the short-term, giving you the opportunity to short the fund from near $30.50.

I will warn you though that there are almost certainly better places from which you may wish to short the market. Healthcare oriented issues tend to be defensive in nature. That means that XLV will likely fall less precipitously than the broad market does if we enter into a bear market again. While shorting XLV will almost certainly be profitable, it will not be the most efficient use of your margin capital.

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