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Health Care ETFs Retreat on DOJ Approval of Aetna-CVS Merger

This article was originally published on ETFTrends.com.

The Department of Justice issued a preliminary approval for CVS Pharmacy to acquire health care insurance company Aetna, possibly paving the way for transformative changes in the industry as cries for more affordable care emanating from consumers and regulators get louder.

The Health Care Select Sector SPDR ETF (XLV) slid 0.42% as of 11:45 a.m. ET, Vanguard Health Care ETF (VHT) fell 0.54%, iShares US Medical Devices ETF (IHI) was down 1.21%, and iShares US Healthcare ETF (IYH) slid 0.55%.

As part of the approval process, the DOJ set forth the condition that Aetna had to divest itself from its Medicare Part D drug plan, which it eventually sold to WellCare Health Plans for an undisclosed amount late last month. The Justice Department also just recently approved a merger of heath insurer Cigna and pharmacy benefits manager Express Scripts.

"The divestitures required here allow for the creation of an integrated pharmacy and health benefits company that has the potential to generate benefits by improving the quality and lowering the costs of the healthcare services that American consumers can obtain," Assistant Attorney General Makan Delrahim said in a statement.

The latest merger and acquisitions activity in health care come as online retailers like Amazon are clamoring for market share in the health and pharmaceutical business with its acquisition of PillPack during the summer. In addition, Amazon CEO Jeff Bezos, JP Morgan CEO Jamie Dimon and Berkshire Hathaway CEO Warren Buffett are working on a joint venture to revamp health care to make it more accessible.

Health Care ETFs Retreat on DOJ Approval of Aetna-CVS Merger 1

Related: Jamie Dimon: Health Care Venture is Long-Term Plan

Health Care Sector a Value Option?

As investors pivot from a growth-oriented mindset into one that is more value-oriented, many might be wondering which sector to allocate their capital to as the markets delve deeper into this late cycle. One sector that could see continued strength once this bull run begins to lose its momentum is health care.

According to an article in Reuters, health care has been in the forefront in the major sectors of the S&P 500 for the third quarter, rising as much as 13%. Before then, tech and consumer discretionary have been in pole position, but as investors begin to cycle out of growth, they could be looking to more value-oriented sectors like health care to lead them out of the bull market and beyond.

“In sector reallocation, momentum certainly plays a role, and we are still very early in the momentum of the healthcare sector,” said David Lafferty, chief market strategist at Natixis Investment Managers.

Furthermore, health care is continuously looking to utilize today's technology and could be more transformative. allowing for more efficiency in operations, such as the use of blockchain technology. The use of blockchain has allowed the health care sector to start creating specific applications that take advantage of peer-to-peer data distribution, offering better versatility and security over database systems that are currently in use.

As a result, the use of blockchain technology can help pharmacies track their inventory more efficiently, as well as keep better track of dispensing medication to patients. Additionally, blockchain technology can help care providers, such as physicians, specialists, subspecialists, and surgeons share patient information easier for faster expediting.

With those improvements in technology and the price of health care equities relative to value propositions, health care could lead the sectors when a market correction eventually takes place.

“Healthcare really is giving investors a lot of bang for its buck right now,” said Martin Jarzebowski, healthcare sector head at Federated Investors.

As such, a health care ETF like CURE can also be used as a defensive play in addition to a short-term profit tool. As the bull run gets longer in the tooth, health care can serve as a safe-haven sector for investors cycling out of their growth-oriented investments.

“The later we get in the cycle, our enthusiasm for healthcare has only picked up,” Lafferty said.

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