ETF Trends
ETF Trends

The healthcare sector, the third-largest sector allocation in the S&P 500, has been rebounding in impressive fashion this year. However, some corners of the healthcare space are seen as vulnerable to the effort to repeal the Affordable Care Act (ACA), also known as Obamacare.

For the most part, the sector 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 when the Obamacare repeal effort was unveiled, including the SPDR S&P Health Care Services ETF (NYSEArca: XHS).

“If the CBO’s projection comes true that 24 million more Americans becoming uninsured by 2026 if the bill passes, healthcare companies will be deeply impacted,” reports ETF Daily News. “Insurers will no doubt be affected as fewer people covered would mean lower premium revenue. That’s not even to mention the fact that premiums could be driven further down if price competition increases, a Trump selling point during the campaign. I think though that the hospitals and other healthcare facilities operators, in particular, could be most affected if the bill passes.”

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.

Hospital stocks were seen as big winners under Obamacare because with more Americans having access to health insurance, hospital operators would be able to be compensated for more procedures and services while providing fewer services for free.

Additionally, the actuaries calculated that around 8.4 million Americans became insured in 2014 and noted their increased use of medical services. The number of people on Medicaid is projected to increase to 78.1 million by 2024, outstripping Medicare, which is expected to have 70.3 million enrolled.

“While hospital stocks could see the greatest impact from the bill’s passage, the downward pressure would no doubt spill over into just about every area of the healthcare sector. The insurance providers might also be looking at a smaller customer base to work with and, if the sale of insurance across state lines becomes a reality, prices might be forced to come down amid greater competition. The service providers would be a downstream casualty of weaknesses in the hospital group. Fewer customers could mean lower demand for their services as well,” according to ETF Daily News.

For more information on the healthcare sector, visit our healthcare category.

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.