A rash of cautious optimism has propelled health funds to an encouraging start for 2010. With healthcare reform looking stalled at best, the funds have benefited from a "relief rally," says Morningstar analyst Christopher Davis.
Overall, health funds are the top-performing domestic stock fund category so far this year, according to Morningstar. To date, their 2010 returns are 2.74 percent. Financial funds are next in line, with year-to-date returns of 0.82 percent. "It's looking less likely that something is going to happen with healthcare reform," says Davis. "With that uncertainty lifted from the sector, I think that's been helpful."
Health funds have also gotten a boost from encouraging earnings reports from pharmaceutical companies. "I think investors have become more optimistic about pharmaceutical stocks," says Davis. "The stocks are [also] really inexpensive by historical standards."
[Also see 4 Funds for the Record Books.]
Finally, health funds' sluggish performance last year left them with plenty of room to grow in 2010. Because of their defensive nature, they tend to hold up well through downturns—as they did in 2008—but they also tend to trail their peers during rallies like the one the market saw last year.
Within the health category, biotechnology funds have been the biggest winners so far in 2010. As evidence, take a look at the names of the category's top five performers this year: ProFunds Biotechnology UltraSector Inv (symbol BIPIX), Rydex Biotechnology Adv (RYOAX), Fidelity Advisor Biotechnology (FBTAX), Fidelity Select Biotechnology (FBIOX), and Franklin Biotechnology Discovery (FBDIX).