The Patient Protection and Affordable Care Act, or Obamacare as it is commonly referred to, does not make for easy reading. That is unless one enjoys thousands of pages of legal and political jargon. Buried deep in Obamacare is a provision that, in theory, should have been bad news for a couple of ETFs, but has not been. At least not yet.
Obamacare contains a punitive tax on medical device manufacturers, one that did not receive much attention in the time leading up to the debate on the legislation or even after the package was signed into law. The Battelle Technology Partnerships Practice called it “a stealth tax,” noting that punishing medical device makers would lead to tens of thousands of cut jobs and billions of dollar lost GDP for the U.S. [Medical Device ETFs Could be Hit by Obamacare Tax]
Medical device ETFs have, to this point, shaken off those fears. Year-to-date, the iShares U.S. Medical Devices ETF (NYSEArca: IHI) is up nearly 16%. IHI’s smaller rival, the SPDR S&P Health Care Equipment ETF (NYSEArca: XHE), has jumped 14%, indicating that both funds can be added to the list of Obamacare ETF winners when the logical assumption was that these ETFs would have been Obamacare losers. [An Obamcare ETF Winner]
Investors are not steering of IHI as the fund has attracted $72.5 million in new investments this year, according to Index Universe data.
IHI has been able to muster an impressive showing even after some of its marquee constituents, including Medtronic (NYSE: MDT) and St. Jude Medical (NYSE: STJ), announced layoffs related to the Obamacare medical device tax. Those stocks combine for 16.3% of IHI’s weight and Medtronic is the ETF’s largest holding with a weight of 11.2%.
Still, the tax poses a significant risk to the medical device industry, particularly smaller firms that rely on venture capital funding in their early stages. The 2.3% tax on revenue will likely be passed on by larger medical device firms to consumers, but as the tax went into effect earlier this year, venture capital investment in medical devices has all but ceased, report Fred Burbank and Thomas J. Fogarty for the Wall Street Journal.
Investors may want to keep an eye on IHI in the near-term because some senators are working to repeal the medical device tax. That group includes Senators Amy Klobuchar and Al Franken, two Minnesota Democrats. Every other year is an election year in the U.S. and Franken is up for reelection in 2014 following a narrow victory in 2008 in which he did not capture a majority of the vote. Medtronic and St. Jude are based in Minnesota.
iShares U.S. Medical Devices ETF
ETF Trends editorial team contributed to this post.