Profiting From Trading Stocks Of The S&P 500 Healthcare Sector (NYSEARCA:XLV)

This previous article described a profitable trading strategy with the stocks of the Technology Select Sector SPDR ETF (XLK), and this article described a strategy with the consumer staples stocks (XLP) of the S&P 500. Similarly, the healthcare stocks of the S&P 500 can be profitably traded to provide good returns.

Emulating the Healthcare Select Sector SPDR ETF

The analysis was performed on the on-line portfolio simulation platform Portfolio 123.

Since historic holdings of the Healthcare Select Sector SPDR ETF (XLV) are not published, a custom universe was constructed from the S&P 500 healthcare stocks of FactSet’s Revere Business Industry Classifications System.

The rule to set up the custom universe “S&P 500 (HEALTH)” in Portfolio 123 is: RBICS(HEALTHCARE).

The current holdings (61 stocks) of S&P 500 (HEALTH) are almost identical to the current holdings of XLV (63 stocks).

Backtesting of S&P 500 (HEALTH) universe

A backtest from 1/2/2009 to 9/23/2020 with all the cap-weighted stocks in the custom universe shows a 99% correlation with the performance of benchmark XLV and identical total returns of 364% over this period. A management fee of 0.3% was taken into account in the simulation, a bit higher than the 0.13% fee that the managers of XLV currently apply. In Figure 1 below, the red graph depicts the performance of the custom universe and the blue graph (mostly hidden) depicts the performance of XLV.

From the beginning of 2000, the custom universe shows 82% correlation with the performance of benchmark XLV and a total return of 355% versus 348% for XLV.

One can, therefore, expect that the custom universe S&P 500 (HEALTH) should reasonably accurately reflect the performance of the cap-weighted holdings of XLV, and stocks selected by the model should not differ much from what would have been selected from a universe of the actual historical holdings of XLV.

Trading 5 stocks from the custom universe S&P 500 (HEALTH)

The iM-Top5(XLV)Select trading strategy invests periodically in only five equal weighted stocks selected by the Portfolio 123 “Greenblatt” ranking system from various industries in the custom universe S&P 500 (HEALTH). The industries are:

  1. Biopharmaceuticals with a dividend yield 2% greater than that of the S&P 500 index
  2. Miscellaneous Healthcare
  3. Outsourced Development and Manufacturing Services
  4. Diagnostics and Drug Delivery Devices
  5. General Medical Devices
  6. Other Medical Devices

Currently, there are 34 companies in the above-named industries.

The buy rule is simply a listing of industries 1 to 6 above with the yield stipulation for Biopharmaceuticals.

A percentile is assigned to each stock in the universe based on the ratio Free Cash Flow Latest Quarter to Total Assets Latest Quarter, with the highest ratio in the array getting a value of 100. A position is sold only after a minimum holding period of 4 weeks if this array value gets less than 80, or if a position shows a loss after 6 weeks from when it was bought.

Figure 2 shows the simulated performance of this strategy from 1/2/2000 to 9/28/2020 and also that of the benchmark XLV. The model shows an annualized return of 21.7% (XLV produced 7.6%) and similar maximum drawdowns of -40%. Annual turnover is low, about 250%. Trading costs of 0.12% of each trade amount were assumed in the simulation.

Healthcare stocks have performed reasonably well since 2009, with XLV showing a 14.1% annualized return for the period 1/2/2009 to 9/28/2020, similar to the 13.8% for the SPDR S&P 500 Trust ETF (SPY). The simulated performance of the trading strategy for the same period is shown in Figure 3. The model outperformed XLV; the backtest shows an annualized return of over 23% and similar maximum drawdown of about -30%.

Investment Risk

In the table below are the risk statistics from 2000 to 2020 for the model iM-Top5(XLV)Select and XLV relative to the benchmark S&P 500 (SPY). It is evident from the risk measures that the trading strategy carries less risk than investing in SPY over the longer term. However, XLV has a lower Standard Deviation signifying lower volatility, but also much lower Sharpe and Sortino ratios than the iM-Top5(XLV)Select model, indicating lower performance as adjusted by the associated risks.


The analysis shows that the iM-Top5(XLV)Select investment strategy would have produced excellent returns, much preferable to a buy-and-hold investment in stock index funds such as XLV or SPY. Reasonably high withdrawal rates should be possible without depleting the investment.

Moderate trading is required. The model shows a reasonable average annual turnover of about 250%, with a position held on average for 20 weeks and not shorter than 4 weeks. The current holdings are listed in the appendix.

Also, at iMarketSignals, one can follow this strategy where the performance will be updated weekly.


Current Holdings (as of 9/28/2020)




Days Held


MTD Mettler-Toledo International Inc. 23 B 63 HCAREMISC
WAT Waters Corp. 12 B 1981 HCAREMISC

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Results shown are hypothetical and the result of backtesting over the period 2000 to 2020. No claim is made about future performance.

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