Healthcare has been one of the hottest sectors in the financial markets over the past few months. Key exchange-traded funds in this sector have seen returns ranging from 10.54% to 18.08%. Two of the most popular ETFs used by retail investors to track this sector are the iShares U.S. Healthcare ETF (IYH) and the Healthcare Select Sector SPDR ETF (XLV).

The IYH ETF is used by many retail traders to gain exposure to U.S. healthcare equipment and services, pharmaceuticals and biotechnology companies. As of of June 25, 2014, the fund sector breakdown was divided between 68.18% pharmaceuticals & biotechnology and 31.70% healthcare equipment & services.

Performance of IYH

Taking a look at the chart of IYH, you’ll see that it has been trading within a very strong uptrend over the past five years. You’ll also notice that it is trading near all-time highs, and based on its chart, it doesn’t look like this trend will end anytime soon. Taking a look at the Relative Strength Index, the MACD and the bullish divergence between key long-term moving averages confirms that the upward momentum is likely to continue.

Components of iShare U.S. Healthcare ETF

When looking for ideas for investing in the healthcare sector, it's a wise move to investigate the top holdings of key ETFs, such as IYH. The table below shows its top holdings.

Company

Weight (%)

Johnson & Johnson Inc. (JNJ)

11.97

Pfizer Inc. (PFE)

7.60

Merck & Co. Inc. (MRK)

6.88

Gilead Sciences Inc. (GILD)

5.03

Amgen Inc. (​AMGN)

3.62

Source: iShares.com

Taking a look at the chart of JNJ, which is the ETF’s largest holding, you’ll see that it is trading near all-time highs. Based on the technical indicators it doesn’t seem like this trend is about to reverse and it wouldn’t be surprising to see long-term traders protect their positions by setting a stop-loss order below the 200-day moving average, which is currently at $93.66. Given that there is no overhead resistance, the trend is definitely in the upward direction, and ETFs such as IYH will continue to benefit until key indicators confirm a reversal in the uptrend. (For more, see: The ABCs of Risk Management.)

Another key holding of the IYH fund is Merck & Co., which is also trading near all-time highs and looks positioned to make a continued move higher. As you can see from the chart below, the 50-day and 200-day moving averages are diverging and the price is currently testing the near-term swing high of $59.39. If the bulls are able to send the price above this level on significant volume then there would be little overhead resistance that would prevent a move toward the mid $60 level. (For more on how to use these indicators, see: Trading With Moving Averages.)

The Bottom Line

As shown on the chart of the iShares U.S. Healthcare ETF above, companies within the healthcare sector seem to be poised to make a move higher. Based on the analysis of key holdings such as Johnson & Johnson and Merck & Co., this sector should be near the top of any active traders' watch list. (For more, see: Evaluating Pharmaceutical Companies.)

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