The Health Care Select Sector SPDR (NYSEArca: XLV) is poised to close lower on a year-to-date basis, which would be the the first annual loss for the largest healthcare exchange traded fund since 2008.
However, there are some segments within the S&P 500’s third-largest sector weight that offer rebound potential for 2017.
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.
SEE MORE: A Checkup With the Medical Device ETF
IHI “is an example of a healthcare ETF where looks can be deceiving. As of Dec. 9, IHI is up 10.3% year-to-date, which sounds good compared to other healthcare ETFs, but IHI’s leadership among its peers has been waning. The medical devices ETF is off 3.3% over the past three months, a showing that is 80 basis points worse than XLV over the same stretch,” reports InvestorPlace.
Industry observers argue that medical technology companies can tap into increased healthcare spending among emerging economies while the U.S. market has matured and could experience slower growth. Looking ahead, in the years through 2024, spending growth is projected to average 5.8% and peak at 6.3% in 2020.
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.
However, there are some political factors that can work in IHI’s favor.
“When the Affordable Care Act (ACA), also known as Obamacare, was passed in 2010, the legislation include a tax on medical device companies, including those found in IHI. It is widely expected that the Trump Administration will work to repeal that tax and do swiftly,” notes InvestorPlace.
That tax has been temporarily suspended, an action that took place under President Obama. IHI is up nearly 3% over the past week.
For more information on the healthcare sector, visit our healthcare category.