It will take a Christmas miracle for the Health Care SPDR (ETF) (NYSEARCA:XLV) to finish 2016 in the green. With a dwindling number of trading days remaining in the year, XLV, the largest healthcare exchange-traded fund by assets, is down 3.2% year-to-date.
That puts XLV in position to notch its first annual loss since 2008, one of the worst years in recent memory for U.S. stocks. Things are so bad for the healthcare sector, the third-largest sector weight in the S&P 500, that XLV is the only one of the nine legacy sector SPDR ETFs likely to close 2016 with a negative performance.
A familiar refrain explaining the struggles of the healthcare sector in 2016 is election year rhetoric.
Regardless of one’s personal politics, it is impossible to deny that Hillary Clinton’s campaign-trail talk aimed at high drug prices hampered biotechnology and pharmaceuticals stocks. While biotechnology stocks and ETFs rallied immediately following Donald Trump’s surprising victory, that enthusiasm has waned as the president-elect has dispensed his own criticism of high pharmaceuticals prices.
That is potentially troubling for XLV and other basic healthcare ETFs because those funds allocate about two-thirds of their combined weights to pharmaceuticals and biotechnology stocks.
While the current environment for healthcare stocks and ETFs looks fraught with peril, things could change for the better in 2017. Consider these three healthcare ETFs as rebound plays in the new year.
Healthcare ETFs Looking for a Rebound: iShares Dow Jones US Medical Devices ETF (IHI)
Expense ratio: 0.44% annually, or $44 on a $10,000 investment.
The iShares Dow Jones US Medical Dev.(ETF) (NYSEARCA:IHI) is an example of a healthcare ETF where looks can be deceiving. As of Dec. 9, IHI is up 10.3% year-to-date, which sounds good compared to other healthcare ETFs, but IHI’s leadership among its peers has been waning. The medical devices ETF is off 3.3% over the past three months, a showing that is 80 basis points worse than XLV over the same stretch.
Interestingly, politics could be one of the reasons why IHI is a healthcare ETF to consider for 2017.
When the Affordable Care Act (ACA), also known as Obamacare, was passed in 2010, the legislation include a tax on medical device companies, including those found in IHI. It is widely expected that the Trump Administration will work to repeal that tax and do swiftly.
To be fair, the tax has been temporarily suspended and President Barack Obama is still in the White House. Plus, IHI has been one of the best-performing, non-leveraged healthcare ETFs since Obama took office, returning over 260 percent over that time.
Healthcare ETFs Looking for a Rebound: Loncar Cancer Immunotherapy ETF (CNCR)
Expense ratio: 0.79%
Among healthcare stocks, cancer names have been laggards this year, and that is saying something. Just look at the Loncar Cancer Immunotherapy ETF (NASDAQ:CNCR), which is off 20.9% year-to-date, putting the lone ETF dedicated to cancer stocks in bear market territory.
CNCR tracks the Loncar Cancer Immunotherapy Index, which focuses on biotech stocks that make products such as checkpoint inhibitors, next-generation vaccines and chimeric antigen receptor technologies.
Bluebird Bio Inc (NASDAQ:BLUE), CNCR’s second-largest holding, recently reported positive phase 1 clinical trial data on its multiple myeloma therapy, which is one of the hotter areas of the biotech growth space.
Xencor Inc (NASDAQ:XNCR), one of the best-performing healthcare stocks this year, revealed positive midstage trial results for its treatment for a rare immune disorder last month, so there are potential catalysts for CNCR in 2017 as these and other trials advance.
Healthcare ETFs Looking for a Rebound: PowerShares DWA Healthcare Momentum Portfolio (PTH)
Expense ratio: 0.6%
The PowerShares Dynamic Healthcare Sec (ETF) (NASDAQ:PTH) is down almost 11% year-to-date, and explaining this healthcare ETF’s woes is not difficult.
PTH allocates nearly 81% of its combined weight to biotechnology and medical device makers. As we highlighted with IHI, shares of medical device manufacturers have recently suffered, making it difficult for PTH to deliver upside.
This healthcare ETF tracks the Dorsey Wright Healthcare Technical Leaders Index, which is relative-strength-based strategy. Translation: PTH can be a good tactical idea for risk-tolerant investors that, when properly timed, can deliver significant upside.
PTH’s potential to rebound in 2017 lies heavily in how investors view repudiated smaller healthcare stocks next year, because small-cap stocks are over 57% of this healthcare ETF’s weight. If the healthcare sector rebounds on the back of riskier fare, not stodgy blue chips, PTH could soar.
As of this writing, Todd Shriber owned shares of ABT.