Is It Time to Dump These 4 Health Care ETFs?

by Susan J. Aluise | November 17, 2011 9:15 am

As the U.S. Supreme Court prepares to consider whether President Barack Obama’s landmark health care reform is constitutional, pundits of all political leanings are hotly debating the impact their ruling will have on Main Street. But regardless of what those six men and three women decide between now and June, the health care paradigm shift that began when the bill became law in 2010 will have a big impact on Wall Street — particularly on health sector investments.

Here’s why: Even if the High Court rules the law unconstitutional, that likely would impact only the so-called “individual mandate” — the requirement that all Americans purchase health insurance or pay a fine. Congress still has the right to regulate health insurance, authorize new taxes and cut budgets for programs like Medicare. And federal agencies will continue to make rules defining how health care companies may conduct business.

So unless Americans elect a new president and Senate next year that are eager to roll back reform, health care companies will have to play the cards they’re dealt. That could mean big challenges for certain niches in the sector.

While the world waits for the Supreme Court to decide, investors might gain an edge by moving out of investments that will be hurt by the law. While some investors have their chips in individual stocks, others seeking a bit more diversity across the whole sector often deal in exchange-traded funds (ETFs), which let you invest in the performance of a basket of stocks, rather betting heavily on a single company. These four health care ETFs stand to lose on provisions of the law:

  1. iShares Dow Jones Medical Devices (NYSE:IHI[1]). Medical device manufacturers will be hit with a new $20 billion tax beginning in 2013. Companies will have to pay a 2.3% excise tax on all revenues even if they lose money — potentially owing more in taxes than they earn in profit. IHI tracks the Dow Jones U.S. Select Medical Equipment Index. Major holdings include Medtronic (NYSE:MDT[2]) and Covidien (NYSE:COV[3]). With a market cap of $330 million, IHI has a year-to-date return of 0.45% and a current dividend yield of 0.19%.
  2. iShares Dow Jones U.S. Healthcare Provider (NYSE:IHF[4]). Massive cuts in Medicare Advantage, which uses private providers like UnitedHealth Group (NYSE:UNH[5]) and Humana (NYSE:HUM[6]) to deliver services, could hit providers hard. IHF tracks the price and yield performance of the Dow Jones U.S. Select Healthcare Providers Index. Major holdings include UnitedHealth, Humana and WellPoint (NYSE:WLP[7]). With a market cap of nearly $215 million, IHF has a YTD return of more than 9% and a current dividend yield of 0.22%.
  3. SPDR S&P Insurance ETF (NYSE:KIE[8]). If the high court nullifies the individual mandate, health insurers would be stuck with the higher risk of insuring people with pre-existing conditions without being able to spread that risk over younger, healthier individuals that are now uninsured. Health insurers also must pay a market-share based fee beginning in 2014. KIE tracks the performance of the S&P Insurance Select Industry Index. Holdings include AFLAC (NYSE:AFL[9]), Travelers (NYSE:TRV[10]) and MetLife (NYSE:MET[11]). With a market cap of $121 million, the fund’s YTD return is -13.7%, and its current dividend yield is 2%.
  4. SPDR S&P Pharmaceuticals ETF (NYSE:XPH[12]). Paying for health reform will cost pharmaceutical companies $2 billion a year — and if federal regulations require higher rebates for Medicare and Medicaid, their revenue could drop by 2% to 7%, Moody’s said Wednesday. XPH tracks performance of the equally weighted S&P Pharmaceuticals Select Industry Index. Holdings include Questcor Pharmaceuticals (NASDAQ:QCOR[13]), Eli Lilly (NYSE:LLY[14]) and VIVUS (NASDAQ:VVUS[15]). With a market cap of about $240 million, XPH has a YTD return of 6.6% and a current dividend yield of about 1%.

As of this writing, Susan J. Aluise did not own a position in any of the aforementioned stocks.

Endnotes:
  1. IHI: http://studio-5.financialcontent.com/investplace/quote?Symbol=IHI
  2. MDT: http://studio-5.financialcontent.com/investplace/quote?Symbol=MDT
  3. COV: http://studio-5.financialcontent.com/investplace/quote?Symbol=COV
  4. IHF: http://studio-5.financialcontent.com/investplace/quote?Symbol=IHF
  5. UNH: http://studio-5.financialcontent.com/investplace/quote?Symbol=UNH
  6. HUM: http://studio-5.financialcontent.com/investplace/quote?Symbol=HUM
  7. WLP: http://studio-5.financialcontent.com/investplace/quote?Symbol=WLP
  8. KIE: http://studio-5.financialcontent.com/investplace/quote?Symbol=KIE
  9. AFL: http://studio-5.financialcontent.com/investplace/quote?Symbol=AFL
  10. TRV: http://studio-5.financialcontent.com/investplace/quote?Symbol=TRV
  11. MET: http://studio-5.financialcontent.com/investplace/quote?Symbol=MET
  12. XPH: http://studio-5.financialcontent.com/investplace/quote?Symbol=XPH
  13. QCOR: http://studio-5.financialcontent.com/investplace/quote?Symbol=QCOR
  14. LLY: http://studio-5.financialcontent.com/investplace/quote?Symbol=LLY
  15. VVUS: http://studio-5.financialcontent.com/investplace/quote?Symbol=VVUS

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