Even with the federal government’s best efforts to hinder the industry, the iShares U.S. Medical Devices ETF (NYSEArca: IHI) continues to be a stalwart among health care ETFs.
IHI is trading modestly lower Thursday, but the ETF hit a new all-time Wednesday. Year-to-date, IHI is up 12.7% after surging nearly 38% last year. IHI’s stellar showing over the past 21 months is made all the more impressive when considering a stealth tax on medical device manufacturers hidden in the Affordable Health Care Act (Obamacare) went into effect at the start of 2013.
When the medical device tax was initially revealed, some independent, non-partisan groups projected the tax would lead to tens of thousands of cut jobs and billions of dollar lost GDP for the U.S. [Obamacare is Unhealthy for Medical Device ETFs]
Fortunately for investors in medical device companies and IHI, the health care sector has been a market leader since the start of 2013. The Health Care Select Sector SPDR (NYSEArca: XLV), the largest health care ETF, and IHI are up 62.4% and 51.2% since the start of 2013 compared to a 41% gain for the S&P 500 over that period. [Investors Still Love Health Care ETFs]
In addition to overall ebullience toward health care stocks, IHI has benefited from other catalysts, including and perhaps not surprisingly, incompetence on the part of government revenue collectors. It was expected that the Obamacare medical device tax would generate $1.2 billion in tax revenue between April and September 2013, but the real figure was just 75% of that, reports Sally Pipes for Forbes.
Again, not surprisingly, the medical device tax has proven to be more of a mess than useful revenue-generating tool. As Forbes reports, some companies are paying too much on the tax, some are not paying enough while others are being erroneously fined.
Some IHI constituents have fought back in unique ways. For example, Medtronic (NYSE: MDT) said in June that it will acquire rival Covidien (NYSE: COV) for about $40 billion. Medtronic will ditch its long-standing Minnesota base for a headquarters in Ireland to trim its tax tab to Uncle Sam. Medtronic and Covidien are IHI’s largest and fourth-largest holdings, respectively, combining for 17.3% of the ETF’s weight. [Medical Device Marriage Good for This ETF]
Beyond the tax wranglings, there are reasons to consider IHI, even after this epic run. Some market observers see upside to $75 over the next 12 to 18 months for St. Jude Medical (NYSE: STJ). The stock, which currently trades trade at a noticeable discount to some IHI constituents, currently trades just over $64.
In late August, Barron’s said Thermo Fisher Scientific (NYSE: TMO) could rise 20% over the next year. Thermo Fisher and St. Jude combine for about 12% of IHI’s weight.
iShares U.S. Medical Devices ETF
ETF Trends editorial team contributed to this post.