Entering 2019, I wagered that the volatility that permeated markets late last year would be a theme investors would have to contend with again this year, prompting a defensive pick — the iShares U.S. Healthcare Providers ETF (NYSEARCA:IHF) — in the 2019 rendition of the best ETFs contest.
I did not, however, forecast the momentum on the left for Medicare For All, a potentially damaging scenario for many of IHF’s 47 holdings. As I’ve noted in a couple of evaluations of IHF this year, I’m not playing politics. All readers’ political views are respected here. Simply put, IHF’s price action this year confirms that the specter of Medicare For All is a headwind for this fund and its components.
None of those names are outperforming the S&P 500. UnitedHealth is one of the biggest duds in the Dow year-to-date, while CVS has plunged more than 18%.
Finally, Some Good News for IHF
But, after struggling for much of the year, IHF seems to be finding its groove. It would be bold of me to say that this fund is in position to take out the rest of the “Best ETFs of 2019” competition, but things are looking up for IHF.
The chart suggests a bottom was found in late April and IHF has been steadily moving higher since then. Now up almost 3% year-to-date, if IHF can rally another 3% to its 200-day moving average, upside from there could be significant.
Some analysts are bullish on managed-care names and are forecasting rallies for some IHF components over the next 12 to 18 months as Medicare For All chatter cools off. Take the example of Humana (NYSE:HUM), IHF’s ninth-largest holding.
“The company’s shares are trading at 14 times projected earnings, a 25% discount to its five-year average,” reports Barron’s. “After reaching an all-time high of $355.88 in November, the stock has fallen nearly 30%, to around $262.”
Bank of America Merrill Lynch has a $375 price target on shares of Humana. As for UnitedHealth, IHF’s largest holding at a weight of 22.39%, the stock has been on the receiving end of some good news this month.
The company announced a dividend hike earlier this month and the Federal Trade Commission recently cleared the way for UnitedHealth to acquire DaVita. Last week, UnitedHealth said it is buying healthcare payments provider Equian LLC for $3.2 billion. And speaking of dividends, IHF has a trailing 12-month dividend yield of 4.03%.
It’s Probably Not the Best ETF Right Now, But…
As noted earlier, I don’t think IHF has enough mojo to come out on top in this contest when 2019 ends. However, IHF has the potential to deliver double-digit upside from here through the end of 2019.
A bright spot is that healthcare is not one of the sectors to report contracting earnings in the third quarter. Additionally, U.S. healthcare companies typically derive significant portions of their revenue here in the U.S., a percentage that increases in the managed care space. Said another way, IHF and its components are not among the securities that are highly vulnerable to extended trade wranglings with China and that is a plus in the current environment.
Due to the domestic nature of managed care’s revenue stream, the group is also relatively immune to a weaker dollar, a scenario that could arise should the Federal Reserve move forward with cutting interest rates later this year.
As of this writing, Todd Shriber did not hold a position in any of the aforementioned securities.