PSCH ETF: The Small-Cap Health Care Catch-Up Trade (NASDAQ:PSCH)

Healthcare is a sector that has consistently demonstrated strong historical growth and is projected to continue growing. The sector’s ability to innovate and adapt to changing market conditions and regulatory environments makes it a big area to focus on for investors, but like all sectors, has been large-cap momentum dominant. Small-cap Health Care stocks to me look increasingly attractive as a catch-up trade. An easy way to gain access to this part of the market is through the Invesco S&P SmallCap Health Care ETF (NASDAQ:PSCH).

PSCH primarily invests in US-based small-cap companies within the healthcare sector. The ETF was established on April 7, 2010, and has since grown to manage assets worth over $217 million. The fund is designed to mirror the performance of the S&P SmallCap 600 Capped Health Care Index, which is an index measuring the overall performance of common stocks in the health care sector.

The fund is passively managed, meaning it seeks to replicate the performance of its benchmark index rather than actively selecting stocks to outperform the market. This approach results in lower costs, making the PSCH one of the most cost-effective products in its space, with an annual operating expense of just 0.29%.

ETF Holdings

PSCH is highly diversified, investing in a broad range of stocks within the healthcare sector. However, it is essential to look into the fund’s individual holdings to fully understand investment risk. PSCH currently holds 67 stocks, with the top 10 holdings accounting for approximately 36% of total assets under management. This broad diversification helps to minimize company-specific risk.

Holdings in the fund include:

Ensign Group Inc. (ENSG): Leading provider of skilled nursing, assisted living services, and various rehabilitative and healthcare services, with a portfolio weight of 6.03%.

Organon & Co (OGN): Global healthcare company focusing on women’s health, biosimilars, and established brands, with a presence in over 140 markets and a portfolio weight of 4.03%.

Alkermes Plc (ALKS): Biopharmaceutical company developing medicines for the treatment of central nervous system disorders, with a portfolio weight of 3.89%.

Glaukos Corp (GKOS): Medical technology and pharmaceutical firm specializing in treatments for glaucoma, corneal disorders, and retinal diseases, with a portfolio weight of 3.81%.

Merit Medical Systems Inc. (MMSI): Manufacturer and marketer of disposable medical devices used in various medical procedures, with a focus on cardiology and radiology, holding a portfolio weight of 3.66%.

Sector Composition and Weightings

In terms of sector composition, the PSCH invests 100% of its assets in the healthcare sector. However, within the healthcare sector, the fund’s investments are further diversified across several subsectors. The majority of the fund is split between Providers & Services, and Equipment & Supplies.

Peer Comparison

When comparing the PSCH to other similar ETFs in the space, two notable peers are the Vanguard Health Care ETF (VHT) and the Health Care Select Sector SPDR ETF (XLV). VHT tracks the MSCI US Investable Market Health Care 25/50 Index, while XLV tracks the Health Care Select Sector Index. Both are far more tilted to large-caps, explaining why PSCH has underperformed. There’s a big spread here, so to me betting on small-cap Health Care is betting on a catch-up momentum trade with small-caps in general working in the next part of the cycle.

Pros and Cons of Investing in PSCH

Like any investment, the PSCH has its advantages and disadvantages. On the positive side, the fund offers exposure to the high-growth healthcare sector, specifically focusing on small-cap companies that can potentially offer high returns. The fund is also highly diversified, reducing the risk associated with investing in a single stock.

However, the fund also has its drawbacks. The fund’s focus on small-cap stocks introduces a higher degree of volatility and risk, as these companies are often more susceptible to market fluctuations than their larger counterparts.

Key Takeaways

The Invesco S&P SmallCap Health Care ETF provides good exposure for what it does in the small-cap segment of the Health Care sector. While the fund carries its share of risks, particularly due to its focus on small-cap stocks, its high level of diversification and low costs make it an attractive option for investors looking for exposure to this sector who believe large-cap momentum will flip to smaller companies. Good fund for what it does.