ETF Trends
ETF Trends

The big news out of the healthcare sector last week was the emergence of a plan by the Republican-controlled Congress to move forward with an effort to repeal the Affordable Care Act (ACA).

Broadly speaking, the healthcare sector, the third-largest sector weight in the S&P 500, was mostly steady in the face of newly announced alternative to Obamacare. For example, the Health Care Select Sector SPDR (NYSEArca: XLV), the largest healthcare exchange traded fund, posted a modest weekly gain last week, perhaps as markets participants surmised it will take a while before the Republicans can move an Obamcare alternative to the point of being close to becoming law.

Still, some healthcare ETFs sagged last week. For example, the SPDR S&P Health Care Services ETF (NYSEArca: XHS) fell more than 2%.

XHS, as has been previously noted, is intimately levered to the Obamacare trade because the ETF allocates a significant portion of its weight to healthcare facilities stocks, including some of the aforementioned hospital operators. XHS also devotes a big chunk of its weight to managed care providers. Some investors may not want to hear it, depending on their personal politics, but Obamacare has made those exposures in XHS all the more beneficial.

“The legislation contains proposals that will affect hospitals, many of which are credit negative because they would reduce the number of people with health insurance and increase bad debt and uncompensated care costs. However, some elements of the legislation, such as preserving federal funding for Medicaid expansion for several years, have no immediate credit effect, while others, such as eliminating scheduled Disproportionate Share (DSH) cuts for states that did not expand Medicaid, are credit positive,” according to a note from Moody’s Investors Service posted by Amey Stone of Barron’s.

The uninsured rate has declined significantly since late 2013, before the the ACA, or Obamacare, took effect. More Americans gaining access to health insurance could bolster the long-term thesis for ETFs such as XHS. But efforts to repeal Obamacare challenge that investment thesis.

“Under the proposed bill, minimum insurance requirements will be diluted, and coupled with the elimination of the mandate to buy coverage, we believe preventive care may decrease leading to higher costs over the longer term. In additional the further growth in high-deductible plans that is likely, combined with greater levels of uninsured people, could result in higher health care costs to consumers,” according to an S&P note posted by Barron’s.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.