Summary
- RYH oversees a portfolio of equally-weighted U.S. healthcare stocks selected from the S&P 500.
- The ETF clearly has an excellent track record long term, outpacing XLV with lower volatility and better risk-adjusted performance.
- Down 25 days since February 2, RYH looks oversold.
- Due to its construction (which skews to "smaller" large cap and mid cap winners), RYH sees outperformance during big M&A years.
Because most indices are weighted in terms of market capitalization, they are invariably momentum-driven. When an individual stock within their holdings rises in price, these indices automatically assign it a greater presence in the fund. The feedback loop continues as all later fund flows route to these now higher-weight companies.
In contrast, "equal weight" indices short-circuit this momentum. Their methodology ensures they are inherently value-based. The quarterly stricture of trimming the shares of the recently risen ones to give to the shares of lately-fallen ones ensures that profits are booked in a sort of "Dogs of the Dow" equipoise.
In late 2006, Invesco debuted a host of equal weight sector-specific ETFs, (which focus on specific subsets of the large cap S&P 500) as a neat complement to their original market weight sectors.
Invesco S&P 500 Equal Weight Health Care ETF ( RYH ) was created to track the investment of the S&P 500 Equal Weight Health Care Index. With $980.8 million under management, it is presently invested in 65 companies involved in the following segments: Healthcare Technology & Supplies, Healthcare Providers & Services, and Life Sciences Tools & Services. (Of these, 17 are Pharmaceuticals and Biotech).
19.52% of the fund is in the top ten holdings. Believe it or not, this is a lot less concentrated than the average healthcare ETF (42.5%). These 65 stocks have more or less "equal weight" (ranging between 1.16% to 2.26%) in RYH's portfolio, which ensures that they are not distorted by over investment in the big "story stocks" of the moment.
Looking specifically at healthcare, it is interesting to compare the total returns you would have received from RYH compared to [[XLV]], its "market weight" SPDR sector ETF equivalent, especially from its inception (November 1, 2006) to today (February 27, 2023). RYH has outpaced its counterpart:
Yes, RYH clearly has an excellent track record long term. More recently, though, it has been less stellar, slightly underperforming the median over the past month.
This presents an opportunity. The ETF is starting to develop an interesting technical set up. It is clear that the major resistance level of September 12, 2022 was decisively pierced by a "gap up" on November 10, 2022. Most recently, however, the ETF has fallen for the past 24 days (since February 2), and its slow stochastic now suggests a deeply oversold condition.
With a Sharpe ratio of .62%, a Treynor of 13.20% and an information ratio of .48, it exhibits impressive risk-adjusted performance. RYH exhibits a lower volatility -19.14%-- than the median ETF (24.23%) and its beta of .81 is well below the market.
Though its expense ratio of .40 is higher than XLV, the historical outperformance suggests it could be worth it. Various analysts have suggested that 2023 will see a renewed amount of M&A in the healthcare space. PwC thinks transaction volumes will continue to increase due to enhanced attention on private equity platform add-ons and continued sector resilience.
Due to its construction (which skews to "smaller" large cap and "bigger" mid cap winners), RYH receives a dose of outperformance during acquisition years. Private equity and the mega-caps often buy or bid up the healthcare companies in the index.
For further details see:
RYH: This Outperformer Is Temporarily Oversold