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.
Making the near-term future for IHI all the more important to consider is that Reid’s refusal to consider repealing the medical device could cause problems within in his party. Last year, 17 Democrat senators whom voted in favor of Obamacare penned a letter to Reid asking for the tax to be repealed. At the time, the roster of senators to sign the letter to Reid includes both a sitting senator and a senator-elect from Massachusetts, a senator-elect from Indiana, both Minnesota senators, both New York senators, and one each from Michigan, Nebraska and New Hampshire.
Digging deeper into the situation, it is easy to see why IHI could be in focus in the coming weeks. Two of the ETF’s top-10 holdings are based in Minnesota. Two are based in Massachusetts. Another is based in Indiana, another in Michigan and two are based in California. With 2014 right around the corner it is worth noting that Massachusetts, Michigan and Minnesota will have races where sitting Democratic senators must defend seats.
IHI has a smaller, equal-weight rival in the form of the SPDR S&P Health Care Equipment ETF (NYSEArca: XHE), which has gained nearly 21% this year.
iShares U.S. Medical Devices ETF
ETF Trends editorial team contributed to this post.