The healthcare sector, the third-largest sector weight in the S&P 500, is getting some of its groove back in 2017 and that is boosting an array of exchange traded funds. Within that bullish trend, some of the healthcare ETFs that were solid last year amid a disappointing run for the sector are still shining bright.
That includes medical device ETFs, such as the iShares U.S. Medical Devices ETF (NYSEArca: IHI), the largest dedicated medical devices exchange traded fund. IHI has an equal-weight rival, the SPDR S&P Health Care Equipment ETF (NYSEArca: XHE). XHE is up 10% year-to-date while IHI is higher by almost 12%.
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.
“Some of the momentum behind IHI’s rise is politically driven. When the Affordable Care Act (ACA), also known as Obamacare, was enacted several years ago, it contained a tax targeting medical device makers, including some of the companies residing in IHI. Although IHI soared along with the broader healthcare sector during the Obama Administration, data suggests the medical device tax was punitive to the industry’s workers,” reports Investopedia.
That tax is currently under a two-year suspension, but there is plenty of speculation that with the Republicans controlling the White House and both houses of Congress, the medical device tax will be repealed for good. The tax has cost the industry nearly 30,000 jobs over the past several years.
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.