‘Obamacare’ Impact on Healthcare ETFs

May 25th at 8:00am by Tom Lydon

SPDR Health Care Select Sector (NYSEArca: XLV) has been showing signs of an uptrend as companies within the index have dividend yields and decent valuations. The pending Supreme Court healthcare reform decision will eventually steer the healthcare sector.

“Year to date through May 18, XLV was u 4.6%. This was near the 4.3% increase in the health care sector of the S&P 500 index, and ahead of the 3.0% gain for the S&P 500 Index. Interestingly, six of the 10 sub-industries in the sector were ahead of the broader benchmark’s return, led by Healthcare supplies and Biotechnology, but this was partially offset by the larger Pharmaceuticals sub-industry, which was up only 0.9%,” Todd Rosenbluth, S&P Capital IQ ETF Analyst wrote in a recent MarketScope Advisor note. [Checking up on Health Care ETFs]

The ETF XLV has stakes in some of the biggest names in health care: Johnson & Johnson, Pfizer, Abbot Laboratories and Merck. About half of the portfolio is dedicated to pharmaceuticals, followed by Healthcare equipment and Biotechnology. [Healthcare ETFs Look to Supreme Court Ruling]

Going forward, a decision to uphold the Healthcare reform law, or to vacate all or part of the law is due in mid-June of this year. Jeff Loo, head of Healthcare equity research for S&P Capital IQ, says there are three potential scenarios that would materialize from a decision: [Defensive ETFs for a Market Pullback]

  1. The best case scenario for the healthcare industry would be a ruling that the mandate is constitutional and the reform law is to be implemented as scheduled. About 32 million additional customers would seek out the health care industry.
  2. Another possibility is that the Court rules the individual mandate unconstitutional and deems it the core of the reform, therefore invalidating the entire reform. This would have minimal impact upon the sector.
  3. The next scenerio is that the Court rules the mandate unconstitutional, while the rest of the reform remains. This is the worst case scenerio for the sector. The concessions, regulations, fees and taxes that were agreed to would remain, with about 16 million additional Americans seeking out insurance from a Medicaid expansion. This is if the Court rules that a Medicaid expansion is lawful. Overall, these customers have the worst impact upon the sector.

Rosenbluth reports that the sector ETF is positioned to fare well if either scenario 1 or 2 plays out. The strength of the companies that the fund holds will keep performance steady, while the dividend yield is another plus. The fund yields 2.5%.

SPDR Health Care Select Sector

Tisha Guerrero contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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