Established in 1998, the Health Care Select Sector SPDR Fund (XLV) is up 8.5% since its inception. Its portfolio includes companies from various health care industries including pharmaceuticals, health care providers and services, health care equipment and supplies, biotechnology and life sciences. The fund seeks to provide results that track the price and yield performance of the S&P Health Care Select Sector Index.

XLV is the largest ETF in the health care sector, with $15 billion in assets under management and an average daily volume of 8.29 million shares. Each component of the fund is part of the S&P 500 index. The fund is constructed using the market capitalization of the company. The fund has 55 companies as of July 2015. The weighted average market cap of the component companies is $111 billion.

The largest holding in the fund is Johnson & Johnson with a weighting of 9.64%. The second-largest holding is Pfizer (PFE) with a weighting of 7.29%. The third-largest holding is Gilead Sciences, Inc. with a weighting of 6%. The top 10 holdings comprise around 52% of the index's total weighting. From a sector breakdown, 65% of the holdings are in the pharmaceutical sector, with 15% in the health care equipment sector. This is followed by the drug retail sector with 6%.


XLV is an open-ended fund with a committee that selects the components to be included. The fund has an expense ratio of 0.15%, which is reasonable. This low expense ratio is due to the passive investment index strategy. The fund does not seek to outperform a benchmark index and therefore does not require active management. Shares are traded on the New York Stock Exchange. The investment manager is SSgA Funds Management, Inc. Shares trade around $75 a share as of July 2015. The fund has an annual dividend yield of 1.55%.

Suitability and Recommendations

The health care sector has unique risks due to extensive government regulations. Pharmaceutical companies in particular have stringent oversight from the U.S. Food and Drug Administration (FDA). If the FDA makes an adverse ruling on a drug candidate for a pharmaceutical company, it can have a dramatic impact on the stock price for that company. Further, some health care companies have to defend expensive product liability claims, which can be a drag on performance. However, the health care sector has been one of the stronger sectors in the last five years, fueled in part by Obamacare.

XLV may be appropriate for investors who are seeking growth as part of a diversified portfolio. The fund is up 27% in the past three years and is up 8% since inception. The fund did have a drawdown of over 25% during the 2008 financial crisis, as did stocks and funds in many other sectors. The fund is not immune to a broader economic decline. The dividend yield is modest, but investors who buy the fund should expect to profit from share price appreciation as opposed to distributions.

With regard to modern portfolio theory, the health care sector provides a good diversification for a growth portfolio. The fund is heavily weighted to large-cap stocks. The fund has a beta of around 0.7, meaning that it is somewhat less volatile than the broader market. The fund had a trailing three-year standard deviation of 9.29, with a solid Sharpe ratio of 2.65 during that period. On the other hand, the fund has less exposure to small pharmaceutical companies that could experience dramatic growth or be merger targets. Still, the estimated earnings per share (EPS) growth for the next three to five years is 10.92%. XLV is the best fund for investors to gain low volatility exposure to large-cap companies in the health care sector.

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