This article is a part of InvestorPlace’s Best ETFs for 2019 contest. Todd Shriber’s pick for the contest is the iShares U.S. Healthcare Providers ETF (NYSEARCA:IHF).
For InvestorPlace.com’s Best ETFs contest for 2019, my pick is the iShares U.S. Healthcare Providers ETF (NYSEARCA:IHF). IHF is in the midst of a lengthy period of out-performance. Specifically, for the past 36 months, IHF has outpaced the S&P 500 Health Care Index by a whopping 2,000 basis points.
Those points are raised because past performance is never a guarantee of future returns, meaning there is some risk associated with ETFs, such as IHF, that have consistently been bid higher over the past several years.
Diving Deeper Into the IHF ETF
The $1.17 billion IHF tracks the Dow Jones U.S. Select Healthcare Providers Index and is home to 45 stocks. While IHF offers exposure to five industry groups, the fund is dominated by the managed healthcare and healthcare services industries. Those groups combine for 77.48% of the fund’s weight.
IHF is also a top-heavy ETF. One stock, Dow Jones Industrial Average component UnitedHealth Group (NYSE:UNH), commands 14.38% of IHF’s roster, according to issuer data. None of the ETF’s other 44 holdings garner weights of more than 9.09%.
CVS Health (NYSE:CVS) and Anthem (NYSE:ANTM) combine for 16% of IHF’s weight. IHF’s price-to-earnings ratio implies a slight premium to broader domestic equity benchmarks and the fund’s three-year standard deviation of 12.85% is only modestly higher than comparable metrics on the Dow Jones U.S. Health Care Index.
Late last month, UnitedHealth, IHF’s largest holding, boosted its full-year 2019 earnings forecast to $14.40 to $14.70 per share on revenue of $243 billion to $254 billion. Wall Street expected earnings of $14.58 a share on revenue of $244.26 billion.
At least two sell-side analysts chimed in with bullish commentary: One with a price target of $310 on UnitedHealth and another with a price target of $325. Both targets imply significant upside from the $270 level at which the stock currently resides. Next year, UnitedHealth is expected to have “cash flows from operations are expected to range from $17.3 billion to $17.8 billion in 2019,” according to the company.
CVS, IHF’s second-largest holding, recently completed its mega acquisition of Aetna, a deal with a $70 billion price tag. The company is unveiling a new drug pricing model aimed at giving consumers more pricing predictability.
“Under the model, CVS plans to pass through 100% of drug rebates to its health plan clients and says it will be accountable for the impact of drug price inflation and shifts in drug mix,” according to MarketWatch.
IHF’s Political Angle
Few sectors are as affected by happenings on Capitol Hill as healthcare and IHF is one ETF that can be front-and-center in those potential dust ups. On Election Day, Democrats seized control of the House, a victory largely attributable to messaging on healthcare.
Several areas of the healthcare agenda could affect IHF in the new year, including drug prices and the effort to reinforce protections for patients with pre-existing conditions. The fight for lower drug prices is seen as one of the rare bipartisan causes on Capitol Hill, but the pre-existing conditions issue is widely viewed as thornier.
IHF is unlikely to be affected by a “Medicare for all” debate in 2019 because that issue is not only not favored by Republicans, but divisive within the Democratic caucus. While the idea of “Medicare for all” is embraced by party’s ultra-liberal wing, putting that issue on the front burner ahead of the 2020 election cycle could endanger some House Democrats from red or purple districts.
Todd Shriber does not own any of the aforementioned securities.