Health Care ETFs Poised To Resume Run

Two proposed health insurer mergers this year could add spark to an already-hot sector.

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Editor-in-Chief
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Reviewed by: Drew Voros
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Edited by: Drew Voros

After benefiting the last year from “Obamacare” and the influx of new patients that health care companies have seen come into the fold, this year the sector has seen a wave of mergers and acquisitions, with large medical insurers joining the M&A party of recent.

That could take the outperforming health care ETFs up another level after lofty increases the last 12 months.

While biotech M&As have been the strongest driver, another part of the sector—insurers—has begun seeing even bigger deals proposed.

UnitedHealth has made a preliminary takeover approach to Aetna, with a $42 billion market cap, according to the Wall Street Journal on Tuesday. This is on the heels of Anthem and Cigna discussing a merger over the last few weeks that would be similar in size to UnitedHealth and Aetna in terms of the price paid.

Another Leg Up?

Biotech has been the real star performer in the health care sector, and the 12-month performance of 47 percent for the iShares Nasdaq Biotechnology (IBB | A-38) reflects that.

However, more broad-based funds such as the First Trust Health Care AlphaDex (FXH | B-74), the Health Care Select SPDR (XLV | A-95) and the Vanguard Health Care (VHT | A-96) have all seen impressive performance in the last year.



Now, with these recent proposed mergers between health insurers and the potential that they could trigger further consolidation between competitors, those broad-based ETFs may be ready for another leg up. The funds are already outpacing the broad market year-to-date.

Overall, the underlying theme of the securities in these more broad-based ETFs is pretty uniform: 99 percent of U.S. companies are heavy in pharmaceuticals, health care providers and equipment. However, FXH has a stronger tilt to health care equipment—its top allocation—than the other two, which are top-weighted in pharmaceuticals.

Charts courtesy of StockCharts.com

Consolidation Pressure

According to The Wall Street Journal, health insurers are facing intense pressure to strike tie-ups, as an ever-larger share of their business is tied to growing government programs and exchanges tied to the Affordable Care Act, where individuals can get subsidies to buy their own plans. Traditional employer insurance, meantime, isn’t a growth business, so the need for companies to lower their expenses as they battle for market share is acute.

With health insurers now hosting the same M&A action that biotech has seen, a prognosis of continued healthy returns for these ETFs is not that far-fetched.



Drew Voros has nearly 30 years' experience in financial journalism. He was a longtime business editor for the Oakland Tribune and sister papers of the Bay Area News Group, and finance writer for the Hollywood trade publication Variety. Voros' past roles have also included editor-in-chief at etf.com and ETF Report.