XLV: Confidence in Medical Science at Containing Covid Is Highly Beneficial

The year 2020 was so hard for most of us as the pandemic struck bringing an unprecedented level of disruption to our lives. It’s now more than two years that the world is affected by the deadly and invisible virus with millions being infected and millions more have lost their jobs as the economies of many countries were devastated and governments were challenged into putting into place tough social distancing measures.

However, while infection rates have reached a new peak with the Omicron strain (as per the chart below in blue), the number of people who have actually lost the battle against the invisible enemy continues to fall as depicted by the death rate in the grey chart below trending lower.

Source: Google

There are many reasons for the decrease in death rate with the most important ones being the rise in vaccination among populations worldwide as well as the provision of better hospital-level care to patients infected with Covid. This has been made possible by new antibodies treatments. For this purpose, the Health Care Select Sector SPDR Fund (XLV) includes key plays like Johnson and Johnson (JNJ) with its Janssen vaccine as well as Pfizer (PFE) with its Covid pill, as longer-term solutions to countering Covid.

Apparently trivial, but equally important, there is the important role played by diagnostics companies in early detection of the coronavirus so that infected people can be isolated. This separation act has been critical in order to contain the infection, in turn reducing hospitalization rates. Here, companies like Thermo Fisher (TMO) and Abbott (ABT) who were quick to develop relatively cheap Covid tests come to mind. In this respect, for those wondering about the role of these medical devices and tool plays in the future where Covid becomes more analogous to “normal” seasonal flu, there is the stark reality of the coronavirus mutating rapidly into Alpha, Delta, and Omicron strains. Thus, the market for Covid testing should become a constant in the new normal.

Source: ssga.com

Moreover, XLV is not just about Covid as seen with health insurance plays like United Healthcare (UNH). The company makes the system work better for everyone by simplifying the health care experience through the use of advanced data and technologies, breakthrough treatments, and consumer choice. Talking diversification, with normalization in health care, there are a number of sectors including ophthalmology and dentistry as well as clinical trials activities in areas like biotech research which should prove beneficial for XLV’s holdings.

The market seems to already have realized this, rewarding XLV with 7.36% during the last month against only 2.69% for the S&P 500.

Source: Trading View

I believe that this outperformance should continue in 2022, as the role of medical science, especially through sequencers in rapidly understanding the DNA of the coronavirus as well as its mutants has been established. There may be periods of doubt as for example when investors’ high expectations of Merck’s Covid pills were dashed when some clinical trial data suggested that Molnupiravir was less effective than originally thought. This resulted in volatility in the State Street fund around December 13. Subsequently, XLV rapidly overcome this “volatility episode” and is now at the $140-141 range.

Looking at the sector, XLV comes with an expense ratio of just 0.12% and a dividend yield of 1.32%. Another peer, the Vanguard Health Care ETF (XHT) does offer lower fees of just 0.10%, but, it is the State Street fund that has outperformed both on a one-year and one-month basis, by 600 and 110 basis points respectively.

Finally, in line with its five-year performance, XLV should continue with its uptrend and reach the $150-155 level by the middle of 2022.