Medical Device ETF Front and Center in Budget Debate

By any account, the $434 million iShares U.S. Medical Devices ETF (NYSEArca: IHI) has had a banner year. The ETF’s almost 25% year-to-date gain is made even more impressive when noting the fund has soared despite toxic operating environment forced upon medical device makers by politicians.

The Patient Protection and Affordable Care Act, or Obamacare as it is commonly referred to, 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. Now the medical device tax is at the center of another Capitol Hill budget showdown. [Medical Device ETF Soars Despite Political Issues]

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 14.4% of IHI’s weight and Medtronic is the ETF’s largest holding with a weight of 9.9%.

The medical device tax saps manufacturers at 2.3% of revenue, which some large-cap firms such as IHI’s larger holdings can absorb. Still, early-stage, small-cap medical device makers may not be able to afford tithing an additional 2.3% of revenue to Uncle Sam and when the tax initially went to effect last year, venture capital investments in early-stage medical device makers dwindled.

On Saturday, the House of Representatives passed legislation that would repeal the tax. However, Senate Majority Leader Harry Reid (D-Nev.) put out a statement Saturday afternoon saying that Democrats would reject any changes to the Affordable Care Act that Republicans proposed, reports Sarah Kliff for the Washington Post.