Where to Find Opportunity Among Healthcare ETFs

Against the backdrop of presidential election year rhetoric, the healthcare sector and its related ETFs have been surprising laggards this year.

Until recently, one of the areas strength in the otherwise downtrodden sector had been medical devices stocks and ETFs such as the iShares U.S. Medical Devices ETF (NYSEArca: IHI), the largest dedicated medical devices exchange traded fund.

IHI has also seen plenty of mergers and acquisitions activity among its components in recent years, but that trend within the health care sector has come under scrutiny as the U.S. Treasury Department looks to crack down on U.S. firms acquiring rivals with foreign domiciles so that they can avoid paying U.S. taxes. More recently, inversions have occurred after large U.S. companies merged with smaller foreign firms. The U.S. company would reincorporate in a tax-friendlier country, like Ireland, while maintaining much of their core operations in the U.S.

For healthcare ETFs, the good news is that the U.S. economy moving into the late-cycle phase, overall growth may slow and signs of an economic slowdown could pop up. Consequently, investors may also turn to defensive sectors that are less economically sensitive, such as health care.

Related: Healthcare ETFs Ready to Rally

After hitting a record high in October, IHI has succumbed to profit taking and is down more than 8% off that high. That could be creating opportunity in the largest medical devices ETF.

“After an initial rally the sector has dropped back below its smoothed trend and is likely to remain under pressure until a period of basing can develop, in our view. We see deeply oversold conditions vs. a broken trend as neutralizing signals and we’re accordingly placing our emphasis on industry selection,” according to an Oppenheimer note posted by Johanna Bennett of Barron’s.