Healthcare was the best-performing sector of the third quarter, jumping 14.1% — its highest quarterly gain since the first quarter of 2013. The dual tailwinds of encouraging industry fundamentals and the sector’s defensive tilt led to the rally in the sector. The wave of mergers and acquisitions also added to its strength.

Solid Trends

The sector is clearly benefiting from solid corporate earnings, promising drug launches, faster drug approvals, an accelerated pace of innovation, growing importance of biosimilars, cost-cutting efforts, an aging population, ever-increasing healthcare spending, expansion into emerging markets, growing middle class, an insatiable demand for new drugs and Trump’s tax reform. In particular, the new tax legislation has enticed companies to bring offshore cash back home at reduced tax rates, and the repatriated money is being used for share buybacks, dividends, acquisitions and capital spending.

Defensive Nature

The sector’s non-cyclical nature is an advantage in the current environment, where concerns over trade fears and geopolitics have made investors jittery. The worries over U.S.-China trade disputes escalated in the third quarter after Trump imposed a new tariff of 10% on $200 billion worth of Chinese goods starting Sep 24. The tariff will be increased to 25% effective Jan 1. In retaliation, China slapped a tariff of 10% on more than 5,000 American products worth $60 billion.

Trump has further threatened to add a third round of tariffs on another $267 billion of Chinese imports. This would raise the total tariff to $517 billion in goods, which would mean levying duties on nearly everything China exports to the United States. The latest tariff comes on top of the $50 billion that is already in place with 25% duty. China has also hit back with tariffs of equivalent amount of U.S. exports.

Further, the emerging market turmoil especially in Turkey and Argentina, as well as faster-than-expected rate hikes in the United States, led investors’ flight to defensive and stable sectors.

Mergers & Acquisitions

The healthcare sector has been heating up with merger frenzy that could change the landscape of healthcare business. The latest theme in this trend is health insurers trying to consolidate with pharmacy benefits managers to streamline and cut costs in the drug supply chain.

According to the data compiled by Thomson Reuters, healthcare M&A activities doubled in the first half of this year with value of the deals rising to $315.74 billion from $154.87 billion. Valued at $10 billion or more, 36 deals make up for 38% of M&A activities for a total of $950 billion in deals, up from $243 billion in 2017. Notably, the healthcare sector grabbed the third position in terms of 1H deal volume, following energy and media entertainment.

Solid Sector Zacks Rank

The sector boasts a solid rank, which places it in the top 31% of the 16 Zacks Sectors, in terms of ranking. About three-fifths of industries under healthcare have a Zacks Rank in the top 42%, suggesting bullish outlook for the coming months.

The bullish trend is likely to continue at least in the short term. Given this, investors might want to tap into the space with the top-performing healthcare ETFs and stocks of the third quarter. For them, we have highlighted five ETFs and stocks that are poised to perform well heading into the final quarter:

Best ETFs

ARK Genomic Revolution Multi-Sector ETF (ARKG - Free Report)

This is an actively managed ETF focusing on companies that are expected to benefit from extension and enhancement of the quality of human and other life by incorporating technological and scientific developments, improvements and advancements in genomics into their business.

Zacks Rank: N/A
AUM: $338.8 million
Expense Ratio: 0.75%
Third-Quarter Return: 15%

Health Care Select Sector SPDR Fund (XLV)

This is an ultra-popular ETF offering exposure to the broad healthcare sector by tracking the Health Care Select Sector Index.

Zacks Rank: #2 (Buy)
AUM: $19.6 billion
Expense Ratio: 0.13%
Third-Quarter Return: 14.4%

First Trust Health Care AlphaDEX Fund (FXH - Free Report)

This fund follows an AlphaDEX methodology and ranks stocks in the space on various growth and value factors, eliminating the bottom-ranked 25% of the stocks.

Zacks Rank: #2
AUM: $1.3 billion
Expense Ratio: 0.62%
Third-Quarter Return: 14.4%

iShares U.S. Healthcare ETF (IYH - Free Report)

This ETF follows the Dow Jones U.S. Health Care Index and provides exposure to U.S. healthcare equipment and services, pharmaceuticals and biotechnology companies.

Zacks Rank: #2
AUM: $2.4 billion
Expense Ratio: 0.43%
Third-Quarter Return: 14.2%

iShares U.S. Healthcare Providers ETF (IHF - Free Report)

This fund tracks the Dow Jones U.S. Select Healthcare Providers Index, offering exposure to U.S. companies that provide health insurance, diagnostics and specialized treatment.

Zacks Rank: #2
AUM: $968.8 million
Expense Ratio: 0.43%
Third-Quarter Return: 13.8%

Best Stocks

Champions Oncology Inc. (CSBR - Free Report)

Formerly known as Champions Biotechnology, it is engaged in the development of advanced technology solutions to personalize the development and use of oncology drugs. 

Zacks Rank: #1 (Strong Buy)
VGM Score: D
Market Cap: $195.04 million
Third-Quarter Return: 176%

iRadimed Corporation (IRMD - Free Report)

This company is engaged in developing, manufacturing, marketing and distributing magnetic resonance imaging compatible products.

Zacks Rank: #2
VGM Score: D
Market Cap: $396.76 million
Third-Quarter Return: 76.1%

Interpace Diagnostics Group Inc. (IDXG - Free Report)

This company operates as an oil and natural gas exploration and production company in the State of California.

Zacks Rank: #2
VGM Score: D
Market Cap: $43.42 million
Third-Quarter Return: 71.1%

Ra Pharmaceuticals Inc. (RARX - Free Report)

This biopharmaceutical company is involved in the discovery and development of novel therapeutics for the treatment of diseases caused by excessive or uncontrolled activation of the complement system.

Zacks Rank: #2
VGM Score: F
Market Cap: $585.03 million
Third-Quarter Return: 67.04%

Endo International plc (ENDP - Free Report)

This global specialty healthcare company develops, manufactures, markets and distributes quality branded pharmaceutical and generic products as well as medical devices.

Zacks Rank: #2
VGM Score: C
Market Cap: $3.77 billion
Third-Quarter Return: 66.3%