Will health care ETFs be dented by the 2016 Presidential election?

May 10th, 2016 | By | Category: Equities

The common refrain of ‘good news for Wall Street is bad news for Main Street’ has been proven incorrect in the case of health care. President Barack Obama’s Affordable Care Act in 2010 resulted in health care stocks being the darling of US capital markets over the last four years. Since the law was passed on 23 March 2010, the S&P Health Care Index has jumped 86%. However, the sector could now be in jeopardy as the 2016 Presidential election looms.

Healthcare ETFs set for sustained growth

Obama’s changes to healthcare could now hit healthcare ETFs hard as election time looms

So-called “Obamacare” was one of the president’s cornerstone policies and major successes during his eight years in the White House. It expanded and improved health care and cut back on spending via taxes and regulation. Millions of Americans have enjoyed access to health care in a country where one in six are hungry and 44 million people rely on food stamps.

In March 2013, Bloomberg discovered that healthcare stocks were leading the S&P 500 winners alongside consumer staple stocks for the first time in 15 years.

That success continued to last year, when overall S&P 500 returns remained flat, but index performance was sharply divided into winning and losing sectors. Consumer discretionary, health care, information technology and consumer staples were the only four sectors that delivered positive returns – and health care was in second place, up 5.2%.

The ultimate benefit, if this success continues, would be to US health care sector ETFs, a couple of which are domiciled in Europe.

They include the $21.2m iShares S&P 500 Health Care Sector UCITS ETF (IUHC) which costs 0.15%, and the $113.9m SPDR S&P US Health Care Select Sector UCITS ETF (ZPDH) for the same cost.

Before European investors rub their hands with glee, it is worth noting that these European-based ETFs are quite new to market and no investor can capitalise on past performance.

IUHC was only launched in November 2015 and has returned minus 0.64% year to date in sterling terms in London. ZPDH launched in July and is down even further at minus 5.3% year to date in euro terms on the German exchange.

Investors would have had to cash in on a fund like the Lyxor ETF MSCI World Health Care UCITS ETF (HLTG) which has risen over 16% in five years in sterling terms. Top holdings are still US-based companies like Johnson & Johnson and Pfizer, but investors will pay a much higher cost at 0.40% fees.

But the good fortune of health care could be set to change if a Republican and advocate of the free market wins the US election on 8 November. All three candidates – GOP frontrunner Donald Trump, Texas Senator Ted Cruz and Ohio Governor John Kasich – want to dismantle the health care reform and allow interstate competition.

One of Mr Trump’s favourite phrases is: “We are going to repeal every word of Obamacare, we are going to replace it.”

Hope for health care is not lost yet. If either Democrat, Hillary Clinton or Bernie Sanders, are elected, they would both want to preserve Obamacare. And if a Republican wins, they will not enter the White House until January and will spend more time to push their policies through Congress.

Now might just be the time to cash in while health care stocks can thrive.

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