Politics Weigh On Health Care ETFs

Fears of Medicare-for-all are weighing on health care ETFs. Is this an opportunity?

sumit
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Senior ETF Analyst
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Reviewed by: Sumit Roy
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Edited by: Sumit Roy

In a year in which U.S. stocks have been roaring higher, it’s been hard to find pockets of the market that are doing poorly. The S&P 500 has surged 16.7% so far in 2019, sitting close to record highs, and each of the 11 stock market sectors is up—except one.

The exception is health care. Measured by the Health Care Select Sector SDPR Fund (XLV), health care slipped 0.26% in the year-to-date period through April 22, lagging far behind each of the other sectors. Utilities, the second-worst-performing sector, gained 9% in the same period, while every other sector was up double digits, including top-performing technology, with a 26.3% return.

 

Sector Returns

TickerFundYTD Return (%)
XLKTechnology Select Sector SPDR Fund 26.25
XLIIndustrial Select Sector SPDR Fund 21.91
XLEEnergy Select Sector SPDR Fund 20.57
XLYConsumer Discretionary Select Sector SPDR Fund 20.42
XLCCommunication Services Select Sector SPDR Fund19.81
SPYSPDR S&P 500 ETF Trust16.65
XLFFinancial Select Sector SPDR Fund 15.02
XLBMaterials Select Sector SPDR Fund 14.17
XLREReal Estate Select Sector SPDR Fund14.01
XLPConsumer Staples Select Sector SPDR Fund 12.64
XLUUtilities Select Sector SPDR Fund 8.96
XLVHealth Care Select Sector SPDR Fund -0.26

Data measures total returns for the year-to-date period through April 22.

 

Political Overhang

Health care’s stark underperformance compared with the broader stock market is the worst since 1993, according to Bloomberg. That was the year in which President Clinton tried to push a sweeping health care reform bill through Congress. The bill never became law, but at the time, it raised worries that profits for the health care industry could take a hit.

A similar thing happened in 2010, when the Affordable Care Act, better known as Obamacare, actually became law thanks to Democrats’ control of the presidency and both chambers of Congress. Health care lagged the S&P 500 by 5.3% that year.

Then again in 2016, during a bitter election year in which both leading candidates, Donald Trump and Hillary Clinton, bashed the industry for keeping drug costs too high, health care returned 4.4% less than the market.

Election Cycle Volatility

Clearly, as history suggests, volatility in health-care stocks and ETFs is not unusual in periods around major elections, or when far-reaching health care legislation has the potential to pass.

“Volatility picks up for health care stocks around election cycles as sentiment moves around in reaction to different candidates’ plans for changing the health care sector, especially since health care benefits have been the key topic for voters since 2007,” said Brian Tanquilut, health care analyst at Jefferies.

This year, that volatility has picked up early—more than a year and a half ahead of the U.S. elections— and vigorously, as certain candidates throw their support behind legislation that could completely transform the industry at the expense of health care firms.

Medicare For All

At the forefront of the movement to upend the health care status quo is Senator Bernie Sanders, who unveiled a “Medicare-for-All” bill earlier this month that is also being backed by several other Democratic presidential candidates. Medicare, in its current form, is a national health insurance program for the elderly.

“This proposed piece of legislation would establish a national health insurance program to provide comprehensive protection against the cost of health care and health-related services,” explained Chris Meekins and Joseph Yanchunis, analysts at Raymond James.

In other words, Medicare for all would establish a single-payer, government-run program that would eliminate most private insurance, say the analysts.

End Of Private Insurance?

If the Sanders bill were to pass, the effect on the health care industry would be profound. Medicare “is the low-cost payer to hospitals,” wrote Raj Denhoy and Anthony Petrone, medical device analysts at Jefferies. “If it becomes a bigger portion of the overall payor mix, hospitals will be under a lot of pressure to lower costs.”

If “Medicare-for All” becomes the law of the land, the hospital industry could lose $800 billion over a decade; drug prices might be reduced by 30%; and the private insurance industry would be outlawed overnight, according to analysis by Raymond James’ Meekins and Yanchunis.

It goes without saying that Medicare for all would be devastating for many health care stocks, and by extension, health care ETFs.

Less Than 1% Chance

The prospect of big changes to the health care industry might be scary for investors. But before you sell all your health care funds, understand that nothing is a done deal.

The election is many months away, and there is no telling which presidential candidate will grab the Democratic nomination, let alone who will win the general election.

That’s why Raymond James analysts believe there is less than 1% chance that Medicare for all actually becomes the law of the land in the next five years.

If that’s the case, health care ETFs could end up being a bargain once the political dust settles.

Long-Term Value

Short-term movements aside, most analysts tend to agree that, barring sweeping changes to health care law in the U.S., the sector is a good long-term value after this year’s underperformance.

For investors interested in potentially capturing that value, the aforementioned XLV is the obvious choice. The $17.4 billion ETF is the largest, most liquid health care fund on the market.

However, for investors looking to take bolder bets on the segment, XLV may not be the best option. The actively managed $417 million ARK Genomic Revolution ETF (ARKG) has trounced XLV so far this year, delivering a gain of 35.7% thanks to big bets on gene-related companies like Illumina, Invitae and Intellia Therapeutics.

(Use our stock finder tool to find an ETF’s allocation to a certain stock.) 

Stocks of insurance companies—poised to be the biggest losers if Medicare for all becomes law—aren’t found in ARKG.

Similarly, biotech funds like the ALPS Medical Breakthroughs ETF (SBIO), the Virtus LifeSci Biotech Clinical Trials ETF (BCC) and the SPDR S&P Biotech ETF (XBI) have done well, with double-digit returns.

For a full list of the available health care ETFs and their year-to-date returns, see the table below:

 

Health Care ETF YTD Returns

TickerFundYTD Return (%)
LABUDirexion Daily S&P Biotech Bull 3X Shares45.75
ARKG ARK Genomic Revolution ETF35.70
KURE KraneShares MSCI All China Health Care Index ETF31.71
CHIH Global X MSCI China Health Care ETF29.36
CHNA Loncar China BioPharma ETF25.44
SBIO ALPS Medical Breakthroughs ETF19.69
BBP Virtus LifeSci Biotech Products ETF18.51
UBIOProShares UltraPro Nasdaq Biotechnology18.40
BBC Virtus LifeSci Biotech Clinical Trials ETF18.36
XBI SPDR S&P Biotech ETF17.80
BTEC Principal Healthcare Innovators Index ETF16.52
BIB ProShares Ultra NASDAQ Biotechnology14.56
KMED KraneShares Emerging Markets Healthcare Index ETF12.26
FBT First Trust NYSE Arca Biotechnology Index Fund9.88
PBEInvesco Dynamic Biotechnology & Genome ETF9.60
IBB iShares NASDAQ Biotechnology ETF8.46
BBH VanEck Vectors Biotech ETF8.33
IHI iShares U.S. Medical Devices ETF7.65
XPH SPDR S&P Pharmaceuticals ETF6.51
XHESPDR S&P Health Care Equipment ETF6.21
CNCR Loncar Cancer Immunotherapy ETF5.09
RYH Invesco S&P 500 Equal Weight Health Care ETF4.95
FTXHFirst Trust Nasdaq Pharmaceuticals ETF4.55
PPH VanEck Vectors Pharmaceutical ETF3.91
IEIH iShares Evolved U.S. Innovative Healthcare ETF3.86
PTH Invesco DWA Healthcare Momentum ETF3.84
IHE iShares U.S. Pharmaceuticals ETF3.57
FXHFirst Trust Health Care AlphaDEX Fund3.11
PSCH Invesco S&P SmallCap Health Care ETF1.95
JHMH John Hancock Multifactor Healthcare ETF1.59
IXJ iShares Global Healthcare ETF1.47
FHLCFidelity MSCI Health Care Index ETF1.35
VHT Vanguard Health Care ETF1.31
IEHSiShares Evolved U.S. Healthcare Staples ETF0.74
IYH iShares U.S. Healthcare ETF0.48
RXL ProShares Ultra Health Care0.37
XLV Health Care Select Sector SPDR Fund-0.26
SLIM The Obesity ETF-0.60
PJPInvesco Dynamic Pharmaceuticals ETF-1.82
RXD ProShares UltraShort Health Care-1.90
XHS SPDR S&P Health Care Services ETF-3.08
CURE Direxion Daily Healthcare Bull 3x Shares-4.58
IHF iShares U.S. Healthcare Providers ETF-6.18
PILL Direxion Daily Pharmaceutical & Medical Bull 3X Shares-8.51
BIS ProShares UltraShort Nasdaq Biotechnology-17.65
ZBIOProShares UltraPro Short Nasdaq Biotechnology-27.54
LABD Direxion Daily S&P Biotech Bear 3X Shares-48.06

Data measures total returns for the year-to-date period through April 22.

 

Email Sumit Roy at [email protected] or follow him on Twitter sumitroy2

Sumit Roy is the senior ETF analyst for etf.com, where he has worked for 13 years. He creates a variety of content for the platform, including news articles, analysis pieces, videos and podcasts.

Before joining etf.com, Sumit was the managing editor and commodities analyst for Hard Assets Investor. In those roles, he was responsible for most of the operations of HAI, a website dedicated to education about commodities investing.

Though he still closely follows the commodities beat, Sumit covers a much broader assortment of topics for etf.com, with a particular focus on stock and bond exchange-traded funds.

He is the host of etf.com’s Talk ETFs, a popular video series that features weekly interviews with thought leaders in the ETF industry. Sumit is also co-host of Exchange Traded Fridays, etf.com’s weekly podcast series.

He lives in the San Francisco Bay Area, where he enjoys climbing the city’s steep hills, playing chess and snowboarding in Lake Tahoe.