The Patient Protection and Affordable Care Act, or Obamacare as it is widely known, is this country’s most sweeping health care legislation in multiple generations. It has also been highly controversial, but political partisanship aside, select stocks and ETFs have benefited from President Obama’s efforts to increase access and affordability to healthcare while holding insurance companies more accountable.
The iShares U.S. Healthcare Providers ETF (NYSEArca: IHF) is one such fund. Year-to-date, IHF is up 22.8% and the ETF has surged 34.3% in the past year. Those performances have come after many analysts originally had less-than-encouraging outlooks for the health care sector in a post-Obamacare world. IHF and its 47-stock roster have also remained sturdy in the face of the fiscal cliff and sequestration debates. [ETF Spotlight: Affordable Care Act]
With the U.S. moving forward with the Affordable Care Act, millions of new clients are expected to flow into the health care sector. That portends potentially rosy future outlooks for IHF constituents such as Dow component UnitedHealth (NYSE: UNH) and Express Scripts (NasdaqGS: ESRX). As a result, IHF has jumped almost 23% since Election Day 2012. [ETFs for Obama’s Second Term]
Despite IHF’s obvious success, the ETF’s gains, fueled by its components, have caught some health care sector analysts and observers by surprise. “In some ways, the sector’s good fortune seems counterintuitive: All sectors of the industry are under stress, thanks to various provisions of the federal Affordable Care Act that seek to wrestle with health costs, hospital performance and health insurer profit margins. Hospital and prescription use is flattening,” reports Bill Tolland for the Pittsburgh Post-Gazette.
There are potential risks to consider with health care insurance stocks as well. For example, the impact of sequestration on health care spending is still unknown and there “are still a few question marks surrounding the sustainability of certain Medicare-related revenue streams, particularly Medicare reimbursement of dual eligibles,” according to Morningstar health care analyst Alex Morozov.
Those risks have been known for months, in theory giving the market ample time to price those factors into health care stocks. However, all five of IHF’s top-five holdings, a group that combines for over 46% of the ETF’s weight, are sitting on double-digit year-to-date gains. The worst performer of that quintet is Express Scripts with an 11% gain. The other members of that group after UnitedHealth and Express Scripts are WellPoint (NYSE: WLP), Aetna (NYSE: AET) and Cigna (NYSE: CI).
iShares U.S. Healthcare Providers ETF
ETF Trends editorial team contributed to this article.