Health care funds held their own. But they may not be bargains.

As a defensive part of a portfolio, health care has been reasonably solid — and that is a mixed blessing, some analysts say.

  • By Brian J. O’Connor,
  • The New York Times News Service
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Medical and health care stocks have fared relatively well during the coronavirus pandemic — but there may be better bargains in sectors that have been hammered the hardest during the market sell-off.

“In general, health care is holding up better than the more cyclical parts of the market, especially airlines, hotels and so on,” said Alessandro Valentini, a portfolio manager for Causeway Capital Management. “Health care is more defensive in nature, even in a moment of maximum uncertainty.”

During March, the S&P 500 (.SPX) lost more than 13 percent and the broader market, as represented by Vanguard’s domestic Total Stock Market Exchange-Traded Fund (VTI), fell nearly 15 percent. In the same period, many health care mutual funds and E.T.F.s dropped significantly less. The $19 billion Health Care Select Sector SPDR Fund (XLV), which tracks the S&P 500 Health Care Index, declined just 4.4 percent.

Among more specialized medical funds, the Loncar Cancer Immunotherapy E.T.F. (CNCR), which focuses on 25 domestic companies developing cancer drugs, slipped 10 percent, while the VanEck Vectors Biotech E.T.F. (BBH) fell 4.5 percent.

In the middle of a pandemic, it is especially difficult to predict which specific industries or stocks will have lasting strength. Individual sectors are already responding differently to recent events.

Companies making badly needed ventilators, such as ResMed (RMD), are seeing an increase in demand. In addition, remote medical technologies are flourishing, bolstering companies like Teledoc Health.

But companies focusing on other health care segments have lost business, at least for a while, as doctors postpone elective procedures and other treatments until the virus fades. Zimmer Biomet Holdings (ZBH), a maker of artificial knees and hips, fell more than 26 percent in March.

Some of these beaten-down stocks present investing opportunities, said Nina Deka, senior research analyst for Robo Global, but it’s safer to hold an E.T.F. or a mutual fund.

“At some point, everyone who needs a postponed procedure will be getting one,” Ms. Deka said. “There are a lot of stocks oversold now because of the panic, but the utilization will come back, and this is a great time to be investing in that, including a health care E.T.F. that captures all of it. In my portfolio right now, half the stocks are up and half the stocks are down.”

Johnson & Johnson (JNJ), for example, posted a 20 percent gain between March 23 and March 30, and ended the month down less than 3 percent. But the medical equipment manufacturer Stryker (SYK) declined 23.5 percent.

Another reason broad holdings make sense is that even if a fund does end up holding one or more companies that develops an effective Covid-19 vaccine, anti-viral drug or home virus test, those specific investments may not end up being home runs, said Chris Cordaro, chief investment officer at RegentAtlantic.

“If Company X develops a treatment and it’s $1,000 a dose, will they really be able to charge a premium price?” Mr. Cordaro said. “So it’s probably not going to be a great moneymaker.”

The crisis also gives biotech and pharma development companies a chance to restore their badly stained reputations, said Brad Loncar, chief executive of Loncar Investments and creator of two biotech funds, the Cancer Immunotherapy E.T.F. and the China BioPharma E.T.F. (CHNA) “Things like drug pricing and the opioids epidemic have rightfully angered the public and tarnished the industry’s image. This is a big opportunity to get all of that back,” Mr. Loncar said.

Broad health care funds can be a defensive strategy, but for bargain hunters, the medical sector isn’t the place to look, said Mr. Cordaro.

“Large health care funds haven’t gone down that much, so if you’re looking for a safer place in the market, this would be it,” Mr. Cordaro said. “But if you’re looking for a pop off the bottom, you’re not going to get it.”

Mr. Cordaro said the biggest gains are more likely to come from small-capitalization funds, where concerns about limited liquidity sent investors heading for the exits. These include real estate investment trusts and funds such as the iShares Core S&P Small-Cap E.T.F. (IJR), which tracks the S&P Small-Cap 600 index (.SML), and the DFA U.S. Small-Cap Value Portfolio Institutional Class (DFSVX), which focuses on securities of small-cap U.S. companies, Mr. Cordaro said.

The 2020 elections have receded as a negative factor for health care stocks, said Rebecca Chesworth, a senior equity strategist with State Street. After former Vice President Joseph R. Biden Jr.’s performance against Senator Bernie Sanders of Vermont in the Super Tuesday primaries, the iShares U.S. Healthcare Providers E.T.F. jumped 8.8 percent.

“The risk coming from the more aggressive candidates about Medicare for All is gone, and the whole political situation is much, much easier than the start of the year,” Ms. Chesworth said. “The health care sector will do better than many others.”

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