The Health Care Select Sector SPDR (XLV

), the largest exchange-traded fund (ETF) tracking the healthcare sector, finished the third quarter on solid ground with a gain of about 3%, pushing its year-to-date gain to over 18%. That cements healthcare’s status as this year’s second best sector behind only technology. What investors need to monitor in the healthcare sector going forward are valuations, which, although not alarmingly high, are creeping higher.

“In aggregate, valuations in the healthcare sector have slightly increased to a price/fair value of 1.02, up from 1 at the end of the last quarter and 0.87 at the start of the year as solid clinical data and the falling risk of higher payer pressure on branded drug prices are helping drug stock valuations,” said Morningstar in a recent note. (See also: Why Drug Stocks Will Outperform the S&P and Dow.)

Interestingly, valuations for the broader healthcare sector are inching higher at a time when biotechnology stocks are, broadly speaking, inexpensive…