3 Health Care ETFs Where Components Are Enduring Downgrades


After setting scintillating paces earlier this thanks to the race to develop a coronavirus vaccine, some health care exchange-traded funds are languishing.



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What Happened: It could be a case of election year jitters, frustrations over the vaccine timeline or both, but plenty of health care ETFs, particularly those emphasizing biotechnology and pharmaceuticals equities, are retreating.

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Wall Street isn’t taking the declines sitting down. In fact, a spate of recent downgrades by sell-side analysts are adding fuel to the fire.

“The area where analysts do seem to be worried–somewhat surprisingly given the race for a COVID vaccine–is on shares of Health Care stocks, particularly in the Biotech industry, according to the ETF Research Center (ETFRC).

Why It’s Important: ETFRC notes that of the 10 ETFs most afflicted by declines in sell-side ratings, six are health care funds, one of which is the Invesco Dynamic Biotechnology & Genome ETF (NYSE: PBE). PBE is the worst offender on the list with “a 3.1% decline in consensus rating over the past 24 days,” according to ETFRC.

PBE, which tracks the Dynamic Biotech & Genome Intellidex Index and holds 31 stocks, is lower by 7.39% over the past month.

“A three percent decline might not seem like a lot, but remember it is an average of an average,” said ETFRC. “Specifically, analysts’ ratings are averaged for each constituent in a fund, and then a weighted average of each constituents’ average rating is taken to derive a fund-level change. So a ~3% decline in 3 weeks is a significant change in sentiment, representing the biggest aggregate change among more than 700 U.S.-focused ETF we cover.”

What’s Next: The Invesco DWA Healthcare Momentum ETF (NASDAQ: PTH) and the Principal Healthcare Innovators Index ETF (NASDAQ: BTEC) are next on the offenders list with 1.8% declines in the quality of analyst ratings, meaning analysts are downgraded plenty of components within these funds.

Due in part to Moderna (NASDAQ: MRNA) exposure, BTEC was previously a high flier and it has ample utility for investors beyond the coronavirus. It’s well off its previous highs, but BTEC is higher by 2.16% over the past month.

PTH also offers plenty of exposure vaccine developers and more than 44% of its 51 components are biotechnology names, making the momentum-based strategy vulnerable to the recent spate of downgrades afflicting that industry.

Of the three other health care ETFs on the ETFRC list, two are dedicated biotech funds.

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