Christian Magoon: Health Care Legislation A Boon For Discerning ETF Investors

March 24, 2010

The former president of Claymore takes measure of new
health care legislation, and says careful ETF investors have the best tools around to profit from the upheaval.

Christian Magoon is the former president of Claymore Securities and a widely recognized expert on exchange-traded funds. He now runs Magoon Capital, a Wheaton, Ill.-based ETF consulting firm that has clients worldwide. During his career, he’s been behind the launch of 40 ETFs and 100 unit investment trusts, and raised over $40 billion. At Claymore he built a company known for many “firsts” in the U.S. ETF industry, including funds focused on the BRIC countries (Brazil, China, India and Russia); solar energy, water and shipping.

Following passage of landmark
U.S. health care legislation, Magoon discussed with’s Cinthia Murphy what the bill will mean for health care providers, drug companies and insurers, and how investors should prepare for the upcoming changes. Much of the reaction to the new health care bill is that it will help health care businesses and ultimately result in stronger returns for health care ETFs. Is it that simple?

Magoon: I don’t think it’s that simple. It really depends on what area within the sector you are looking at; we have insurers, pharmaceuticals, biotech companies, medical devices, etc.

The overall great news is that the bill did not include a government-run public option, which was the industry’s biggest concern in terms of competition. It’s also generally good news that there will be a lot more customers—at least 30 million more people—who will now be covered, so there will be a significant jump in volume.

But there’s a toll for these companies as well, because despite the bigger volume, margins are going to shrink. Insurance companies will for sure see the biggest toll. Let’s talk about the subsectors, then. Which ones are coming out ahead on the heels of the legislation?

Magoon: Pharmaceutical and biotech names are definitely the leaders. They were able to avoid the price controls they feared. Despite some expected increase in fees and taxes, they will benefit directly from more people going to doctors and getting prescriptions than, say, insurance companies as pharmaceutical companies gave up less profit potential.

Insurance names, though, were hit the hardest with more rules and regulations than any other subsector. Going forward, the government will be paying less for private Medicare Advantage plans. There are policy premium increase limits and pre-existing health condition coverage mandates that will take effect that will force insurers to revisit pricing structures. The rules will definitely compress their profitability.

But it’s important to note that most of the new regulations will not take effect until 2014, so it’s going to be a while before investors know exactly how insurance companies will respond to these news rules. Does that mean there’s a short- and a long-term strategy to play this legislation?

Magoon: Absolutely. Right now what we are seeing is a relief rally that has pushed all these health care ETFs up. But investors need to be cautious. In the near term, betting on biotech companies is the best bet, as they have the most positive momentum, with ETFs in that subsector hitting multiyear highs. Those companies have a lot of products and solutions in the pipeline, and ongoing merger and acquisition activities led by pharmaceutical companies are likely to continue.

It’s almost as if the more established and stable parents, pharmaceutical companies, are buying the innovative technology of their teenage children, the biotech names. I believe that strong momentum should remain in place in the near term. But in the longer term, pharmaceuticals should outperform biotech names as they integrate their biotech acquisitions into their strong distribution-based businesses, utilize the protections they received from biotech generics in the recent bill, and take advantage of the larger pool of insured in
. In my belief, insurance companies are a distant third in both scenarios due to all the uncertainty surrounding them.



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