Playing Obamacare With ETFs

August 23, 2012

Health care companies are clearly in play, so it’s time to dissect various ETFs that canvass the space.

 

Obamacare is driving  mergers and acquisitions in the insurance space, while big-pharma is snatching up biotechs to replenish aging drug pipelines. In other words, consolidation could continue.

Yesterday brought us news of another merger, with health insurance giant Aetna announcing its plans to take over Coventry Health Care for $5.7 billion.

This merger follows Cigna’s takeover of HealthSpring last November and WellPoint’s merger with Amerigroup earlier this year.

Larger insurance players are targeting smaller rivals with a strong foothold in the Medicare and Medicaid markets, as demand for these programs is expected to increase dramatically due to Obamacare in the coming years.

Adding to the phenomenon is that consolidation is not just specific to insurance alone.

Last year, pharmacy-benefits manager Express Scripts gobbled up Medco for $29 billion. Gilead purchased Pharmasset, while this year GlaxoSmithKline and Bristol-Myers Squibb finalized their mergers with Human Genome and Amylin Pharmaceuticals, respectively.

Throw all this M&A activity together with the Supreme Court upholding Obamacare in late June, and with the wall of baby boomers set to retire in the coming years, and you get a red-hot sector in play.

Not All ETFs Are Created Equal

Naturally, one would expect all health care ETFs to be on a tear, right? Well, that depends on the ETF.

There are now 18 U.S. health care ETFs that range from broad-based to sector-specific funds. Broad-based health care ETFs encompass the following subsectors: pharmaceuticals, providers & services, equipment & supplies, and biotech.

Let’s look at sector-specific funds first.

I’ve charted four iShares ETFs representing each of the four health care subsectors:

  • iShares Dow Jones U.S. Pharmaceuticals Index Fund (NYSEArca: IHE)
  • iShares Dow Jones U.S. Healthcare Providers Index Fund (NYSEArca: IHF)
  • iShares Dow Jones U.S. Medical Devices Index Fund (NYSEArca: IHI)
  • iShares Nasdaq Biotechnology Index Fund (NYSEArca: IBB)

 

I also threw in the broad-based iShares Dow Jones U.S. Health Care Sector Index Fund (NYSEArca: IYH) and the SPDR S&P 500 ETF (NYSEArca: SPY), to compare their returns against the broad market.

Understand that I’m comparing iShares funds here not necessarily because they’re the best funds, but because they’re all cap weighted, and attempt to represent broad exposure to their respective market segments.

Total Return: 1 year

Source: Bloomberg

 

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