When I say the word “momentum,” what’s the first sector that comes to mind?

I’m guessing it wasn’t Healthcare. Looking at today’s market, though, there is no question about it – healthcare has become a momentum sector.

We can see this clearly in looking at the largest momentum ETF from ishares (MTUM), which now has almost a third of its portfolio in Healthcare names.

This is significantly larger than Healthcare’s weighting in the S&P 500 of 14%.

The momentum ETF chooses its holdings by evaluating “each stock’s 6-month and 12-month risk-adjusted excess returns.”

Using this methodology, it should come as no surprise that Healthcare is the top weighting as it has been the best performing sector in the market this year (see chart below). It also should come as no surprise that there is only a 1% weighting to Energy as it is the only sector with negative performance in 2014. What is surprising is the relatively low weighting (1.79%) to Utilities, which is the second best performing sector this year.

Of the top twenty names in the momentum ETF, eight are in the health care sector, including Johnson & Johnson (JNJ), Gilead (GILD), Amgen (AMGN), Celgene (CELG) and UnitedHealth (UNH). Technology is also a big portion of the index, mostly from large cap holdings in Apple (AAPL), Microsoft (MSFT), Intel (INTC), and Facebook (FB).

The top performing health care names in the ETF include Intuitive Surgical (ISRG, +149%), Allergan (AGN, +103%), Actavis (ACT, +99%), Illumina (ILMN, +79%), Edwards Lifesciences (EW, +68%), and Amgen (+60%). Biotechs are highly represented in this list.

Concluding Thoughts

Healthcare is now an important part of the equity momentum factor given its outsized performance relative to the broad market over the past year. As momentum is an objective process, it will remain a large factor as long as it remains a top performer. Should we see a reversal in health care strength, it will have more sizable negative impact to momentum-leaning portfolios today than in prior periods given its larger weighting.

We saw this early in the year when Biotechnology stocks were hit hard (see black line in chart below) in March and April. They have since rebounded to new highs and over the past four years biotechs have outperformed the S&P 500 by an astounding 84%.  The health care sector in general has outperformed the S&P by 34%, also a sizable margin given that the sector is usually considered “defensive” and we are still in a bull market and economic expansion.

Will the outperformance, particularly in biotechs, continue in 2015 or is it time for another sector to emerge as a leader? Perhaps we should ask Janet Yellen who still has a “sell”  rating on the shares.