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