The healthcare sector, the second-largest sector weight in the S&P 500, performed a best-to-worst act in the first quarter of 2019. Healthcare was the best-performing sector in the S&P 500 last year. This year, the opposite is true.
The Health Care Select Sector SPDR (NYSEARCA:XLV), the largest healthcare exchange traded fund (ETF) by assets, is up 7% year-to-date compared to a gain of 12.20% for the S&P 500. The iShares U.S. Healthcare Providers ETF (NYSEARCA:IHF), my pick for this year’s best ETFs contest, is an even more egregious laggard with a year-to-date loss of 1%.
What Happened to the IHF ETF?
Excuses are not the objective of this piece, but looking back at what has plagued IHF in the first quarter can be instructive. With the exception of the “growth-ier” areas of healthcare, namely biotechnology and medical devices, the sector, as noted above, has been a laggard to start 2019.
Perhaps some of the sector’s laggard status to start 2019 is investors taking profits in the group following a solid 2018 or market participants moving into more exciting sectors, such as technology. With IHF, however, the reasons for the fund’s first-quarter struggles are more easily identified.
Entering this year, my thesis for IHF was that the fund could benefit from the Democrats controlling the House of Representatives. As is often noted, healthcare, perhaps more than any other sector, can benefit or be hampered by political wranglings on Capitol Hill.
This is not political commentary, but the fact that so many of the Democrat contenders for that party’s 2020 presidential nomination favor Medicare For All has been a significant drag on IHF. IHF holds 47 stocks, but just two — UnitedHealth (NYSE:UNH) and Anthem (NYSE:ANTM) — really drive IHF’s price action because that duo combines for over 36% of the fund’s weight.
Fortunately, shares of Anthem are up nearly 13% this year because UnitedHealth stock is lower by nearly 1%, making that stock one of the worst-performing members of the Dow Jones Industrial Average. The impact of Medicare For All speculation has been palpable, particularly for UnitedHealth.
Muddying the waters for stocks like UnitedHealth and funds such as IHF is talk among some analysts that although Wall Street does not expect Medicare For All to happen, investors should not expect a snapback rally in managed care stocks once it becomes apparent that single-payer healthcare will not take hold in the U.S.
“In our view, the bill has no chance of passing the [Republican]-controlled Senate and probably little chance even in the [Democrat]-controlled House given Speaker Pelosi’s apparent ambivalence,” JPMorgan analyst Gary Taylor said in a recent note, reports MarketWatch.
However, Taylor notes the Medicare For All Debate is weighing on the healthcare sector and making investors “wary” of being involved with the group.
Bottom Line on IHF
Yes, IHF’s YTD loss is small at this point, but there is some risk here, particularly if the fund falls below $165 on heavy volume. At this point in the year, investors have only pulled $4 million from IHF, which could be a sign some are waiting for the Medicare For All debate to blow over.
Knowing exactly when that debate will be quashed is another matter altogether. Investors considering IHF over the near-term should monitor shares of UnitedHealth for clues about the near-term validity of the IHF thesis.
As of this writing, Todd Shriber did not hold a position in any of the aforementioned securities.