Politics Weigh On Health Care ETFs

April 25, 2019

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

Ticker Fund YTD Return (%)
XLK Technology Select Sector SPDR Fund  26.25
XLI Industrial Select Sector SPDR Fund  21.91
XLE Energy Select Sector SPDR Fund  20.57
XLY Consumer Discretionary Select Sector SPDR Fund  20.42
XLC Communication Services Select Sector SPDR Fund 19.81
SPY SPDR S&P 500 ETF Trust 16.65
XLF Financial Select Sector SPDR Fund  15.02
XLB Materials Select Sector SPDR Fund  14.17
XLRE Real Estate Select Sector SPDR Fund 14.01
XLP Consumer Staples Select Sector SPDR Fund  12.64
XLU Utilities Select Sector SPDR Fund  8.96
XLV Health 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

Ticker Fund YTD Return (%)
LABU Direxion Daily S&P Biotech Bull 3X Shares 45.75
ARKG  ARK Genomic Revolution ETF 35.70
KURE  KraneShares MSCI All China Health Care Index ETF 31.71
CHIH  Global X MSCI China Health Care ETF 29.36
CHNA  Loncar China BioPharma ETF 25.44
SBIO  ALPS Medical Breakthroughs ETF 19.69
BBP  Virtus LifeSci Biotech Products ETF 18.51
UBIO ProShares UltraPro Nasdaq Biotechnology 18.40
BBC  Virtus LifeSci Biotech Clinical Trials ETF 18.36
XBI  SPDR S&P Biotech ETF 17.80
BTEC  Principal Healthcare Innovators Index ETF 16.52
BIB  ProShares Ultra NASDAQ Biotechnology 14.56
KMED  KraneShares Emerging Markets Healthcare Index ETF 12.26
FBT  First Trust NYSE Arca Biotechnology Index Fund 9.88
PBE Invesco Dynamic Biotechnology & Genome ETF 9.60
IBB  iShares NASDAQ Biotechnology ETF 8.46
BBH  VanEck Vectors Biotech ETF 8.33
IHI  iShares U.S. Medical Devices ETF 7.65
XPH  SPDR S&P Pharmaceuticals ETF 6.51
XHE SPDR S&P Health Care Equipment ETF 6.21
CNCR  Loncar Cancer Immunotherapy ETF 5.09
RYH  Invesco S&P 500 Equal Weight Health Care ETF 4.95
FTXH First Trust Nasdaq Pharmaceuticals ETF 4.55
PPH  VanEck Vectors Pharmaceutical ETF 3.91
IEIH  iShares Evolved U.S. Innovative Healthcare ETF 3.86
PTH  Invesco DWA Healthcare Momentum ETF 3.84
IHE  iShares U.S. Pharmaceuticals ETF 3.57
FXH First Trust Health Care AlphaDEX Fund 3.11
PSCH  Invesco S&P SmallCap Health Care ETF 1.95
JHMH  John Hancock Multifactor Healthcare ETF 1.59
IXJ  iShares Global Healthcare ETF 1.47
FHLC Fidelity MSCI Health Care Index ETF 1.35
VHT  Vanguard Health Care ETF 1.31
IEHS iShares Evolved U.S. Healthcare Staples ETF 0.74
IYH  iShares U.S. Healthcare ETF 0.48
RXL  ProShares Ultra Health Care 0.37
XLV  Health Care Select Sector SPDR Fund -0.26
SLIM  The Obesity ETF -0.60
PJP Invesco 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
ZBIO ProShares 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

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