Obamacare Pushes Health Care ETFs Higher

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Health care ETFs were some of the best-performing funds last year thanks in part to the launch of the Patient Protection and Affordable Care Act, or “Obamacare,” as it is widely known. That boost should continue. Other tail winds such as promising new drugs coming to market and more accommodative regulators should keep the sector healthy

With millions of Americans still looking to sign up for the highly controversial health care program, one analyst thinks the party is just beginning for these sector ETFs.

Obamacare launched in October 2013 to little fanfare and a lot of controversy stemming from the government website’s computer glitches. In addition, more than 4.7 million Americans had their health insurance canceled as a result of the plan’s new rules, according to the Associated Press.

Nevertheless, these ETFs were great additions to investors’ portfolios in 2013, including the:

  • Health Care Select Sector SPDR ETF (XLV | A-93), which gained 37.5 percent and charges 0.18 percent, or $18 for every $10,000 invested.
  • iShares U.S. Healthcare ETF (IYH | B-96), which gained 38.1 percent year-over-year and costs 0.46 percent, or $46 for each $10,000 invested.
  • Vanguard Health Care ETF (VHT | A-93), which gained 39.6 percent and charges investors 0.14 percent—or $14 per $10,000 invested.

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Chart courtesy of StockCharts.com

However, investors should note the difference between the three funds in their weightings and exposures as well as fees. For example, VHT has more exposure to biotech than XLV and IYH, which have more exposure to pharmaceutical companies than the Vanguard fund.

All three funds currently make Johnson & Johnson, Pfizer Inc. and Merck & Co. their top three holdings, in that order.

XLV is the largest health-care-focused ETF, with $8.9 billion in total assets and daily liquidity that’s practically unmatched by its rivals. An average of $285 million worth of XLV shares trades every day, or about 20 times its closest competitor’s dollar volume, and all at a relatively tight spread of 2 basis points.

The $2.0 billion IYH trades on average at a 4-basis-point spread, or wide enough to add an additional cost to investors beyond the expense ratio. VHT, which manages $2.5 billion in total assets, has about 45 percent of its portfolio tied to pharmaceuticals, and 11 percent to health care providers and insurance.

So which one of these ETFs should investors use to broadly invest in the health care sector in 2014?

Well, all of them, according to Todd Rosenbluth, director of ETF & Mutual Fund Research at S&P Capital IQ:“We are positive on all three ETFs and we have an overweight on all of them.”

“We think the health care sector will continue to benefit from implementation of the Affordable Care Act,” added Rosenbluth. “We’re talking about millions more insured Americans. That’s going to be good for pharmaceutical companies supplying Americans with drugs who couldn’t get it beforehand. It’s good for biotechnology stocks as well as hospitals. All three of these industries are among the largest in the three ETFs.”

Last year, biotech ETFs were among the best performers in the health care space. “Biotech was a really strong subsector among the better-performing sectors in all of the U.S., and having more exposure to biotech and midcaps helped Vanguard’s product, whereas iShares’ ETF was the worst-performing of the three, because it tends to be more concentrated in the larger stocks,” Rosenbluth noted.

 

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