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These ETFs Poised For Obamacare Pop

Cinthia Murphy

The Affordable Care Act, also known as Obamacare, was officially launched two weeks ago, and while the law still finds itself at the center of an ongoing debate among regulators surrounding government spending, the reality is that, for investors, the impact of Obamacare is already noticeable in various ETFs.

It goes without saying that a law that requires every American to be covered by health insurance by 2014 will be a boon for health care companies, and that’s irrespective of the politics in the nation’s capital involving objections to Obamacare, a partial government shutdown and the possibility of a U.S. debt default.

That's to say it’s no surprise that ETFs that own stocks of those companies are in a good position to reap the benefits of the expected business increase in health care. In fact, many are already significantly outperforming the stock market this year.

Take the Health Care Select Sector SPDR (XLV | A-93), for instance, the largest health-care-focused ETF, with more than $7.6 billion in total assets and daily liquidity that’s practically unmatched by its rivals—an average of $285 million worth of XLV shares trade every day, or about 20 times its closest competitor’s dollar volume, and all at a relatively tight spread of 2 basis points.

The fund, which appeals to retail investors looking for long-term exposure to health care as well as to traders and institutional players looking for liquidity, has now rallied roughly 2 percent since Oct. 1, when Obamacare kicked off. What's more, year-to-date, XLV has seen total returns of more than 31 percent, making it one of the best-performing sSctor SPDRs so far this year. By comparison, the S&P 500 is up about 17 percent in the same period.

XLV is only one of about 30 ETFs slicing and dicing health care stocks, six of which—including XLV—have more than $1 billion in assets each. And like many of its major competitors, it offers sizable exposure to pharmaceutical companies—roughly half the portfolio—and about 10 percent to health care providers and insurance names.

The Vanguard HealthCare ETF (VHT | A-94) is another popular fund in the space, with $2.03 billion in total assets and a portfolio allocation not all that different from XLV’s. About 45 percent of VHT’s mix is tied to pharmaceuticals, and 11 percent to health care providers and insurance.

VHT, too, has gained nearly 32 percent year-to-date, and the fund is also among the cheapest health care ETFs, with an annual expense ratio of 0.14 percent. But it trades on average a far more modest $12.6 million a day, at a 4-basis-point spread, meaning investors are actually shelling out closer to 0.18 percent—or $18 per $10,000 invested—to own it.

Still, the fund has broader-than-most exposure to the health care segment, as it holds some 290 names, making it a good fit for long-term investors, according to IU’s ETF Analytics, in a way similar to the iShares U.S. Healthcare ETF (IYH | A-95), which also holds one of the largest portfolios, comprising some 112 securities.

The main difference here is that IYH has an annual expense ratio of 0.46 percent, or $46 for each $10,000 invested, and it trades on average at a 4-basis-point spread, or wide enough to add an additional cost to investors beyond the expense ratio. IYH, too, is up 31 percent year-to-date.

The list of possibilities when it comes to health care ETFs goes on, and includes funds from just about every major ETF provider out there.

XLV Health Care Select Sector SPDR

Chart Courtesy of StockCharts.com

As an example of some of the strategies available, investors wanting to jump onto the health care bandwagon through a more active approach, for instance, can opt for funds like the First Trust HealthCare AlphaDex ETF (FXH | B-58). The ETF, which employs an enhanced beta index designed to deliver more returns than a traditional capitalization-weighted index fund, has certainly resonated with many investors, accumulating more than $1.1 billion in assets since its inception.

Through its quant-driven index screen, FXH has now rallied 34 percent year-to-date. But that methodology also comes with a pricier tag than other funds in the space—FXH costs 0.70 percent a year, and, on a median basis, it underperforms its index by 28 basis points beyond its expense ratio, meaning investors are paying close to 0.98 percent, or $98 per $10,000 invested, a year in order to own it. That's more than five times as much as Vanguard's VHT costs.

There is also the much-smaller $153 million equal-weighted Guggenheim S&P Equal Weight Health Care ETF (RYH | B-67), which for simplicity’s sake is essentially an equal-weighted version of XLV.

That equal weighting skews the fund’s exposure slightly away from pharmaceuticals—which represent only about 30 percent of the mix—and adds more allocation to other segments like health care equipment and services.

In all, the portfolio, comprising 55 securities, has delivered comparable results so far this year, with total returns of 31.6 percent year-to-date, but again, the weighting methodology comes with a cost:0.50 percent in expense ratio and a median tracking difference that puts its overall cost closer to 0.71 percent a year, or $71 per $10,000 invested.


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