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Mixed Prognosis for Healthcare Stocks

The current climate is great for some, not so great for others

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If someone had told you at the beginning of the year that the Republican-controlled Congress was going to try and fail to repeal and replace the Affordable Care Act (ACA) multiple times during 2017, you probably wouldn’t have believed them. Yet, here we are, nearing the end of the year, and the ACA is still the law of the land.

Mixed Prognosis for Healthcare Stocks
Source: Shutterstock

You might think that this uncertainty would have taken a bearish toll on healthcare stocks, but you’d be wrong in most cases. Many healthcare stocks are keeping pace with, or outperforming, the S&P 500.

You can see this playing out in the comparison chart in Fig. 1 with the following results:

  • The iShares U.S. Medical Devices ETF (NYSEARCA:IHI) is up nearly 29%
  • The iShares U.S. Healthcare Providers ETF (NYSEARCA:IHF) is up close to 18%
  • The S&P 500 is up approximately 15%
  • The iShares Nasdaq Biotechnology ETF (NASDAQ:IBB) is up a little more than 16%
  • The iShares U.S. Pharmaceuticals ETF (NYSEARCA:IHE) is up just under 4%

Fig. 1 — Healthcare ETF Comparison Chart

So what accounts for the differences in performance, and what is the prognosis for each industry group? Let’s take a look.

Medical device stocks — as tracked by IHI — have benefited from the two-year moratorium on the medical device excise tax Congress put into place via the Consolidated Appropriations Act at the end of 2015. The moratorium covers 2016 and 2017, and stocks in the industry group have been flourishing during that time frame. But here’s the thing — the moratorium is set to expire at the end of this year. Look for Congress to extend the moratorium. But, if it doesn’t, IHI may no longer be the darling of the healthcare sector.

Healthcare-provider stocks — as tracked by IHF — have benefited from the gridlock in Washington, D.C. Even though these companies would like to see changes in the law, they still have access to an enlarged pool of healthcare enrollees, thanks to the individual subsidies provided by the ACA. The lack of repeal has forced insurers to raise rates again this year (infuriating individual policy holders), but the profit margins are still there for insurance companies. Look for healthcare providers to continue their steady gains.

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