Regulatory Risk Eases a Bit For Healthcare ETFs | ETF Trends

The SPDR Health Care ETF (XLV), the largest healthcare ETF by assets, and rival cap-weighted, diversified healthcare ETFs still face some risks due to opioid settlements, but some of that overhang is waning due to other factors.

Some market observers believe that while some pharmaceutical companies will be writing large checks to various states for opioid settlements, those risks are being reduced due to the House of Representatives pursuing impeachment against President Trump and the 2020 presidential election.

“Legislation addressing high drug prices is one area where political strife could stall near-term momentum. When changes in policy do occur, they are generally well signaled and slowly implemented, giving companies ample time to adjust business models and capital structures in response,” said Fitch Ratings in a recent note.

Among other factors, XLV and friends have been dogged this year by speculation that Medicare For All could become a reality if Democrats win the White House in 2020. Many of the most visible Democratic contenders for that party’s 2020 presidential nomination are embracing Medicare For All. However, XLV’s recent price action suggests the benchmark healthcare ETF is shaking out of its slumber.

Keeping An Eye Drug Prices

An area of concern is how Congress will treat drug prices. There appears to be bipartisan support for lowering drug prices, which is relevant to XLV and rival funds due to their large pharmaceuticals weight. While there may be momentum for that fight, it may not materialize over the near-term.

“Numerous drug pricing proposals emerged from Congressional committees, the Trump administration, the 2020 presidential candidates and state legislatures,” according to Fitch. “These include a greater role for the Medicare program in negotiating drug prices, the re-importation of drugs from other countries and the elimination of branded drug manufacturer rebates. Additional proposals include the use of international reference pricing in Medicare and commercial health plans, a requirement drug manufacturers pay rebates when price increases exceed inflation, and incentives to encourage increased competition for high-cost specialty drugs through the development of biosimilars.”

One reason to consider XLV, which is heavy on politically sensitive biotech and pharmaceutical stocks, is that much of the political risk weighing on the healthcare sector this year may already be baked into the group.

“Proposals that do not require legislation approved by Congress have a greater likelihood of implementation but the effect on profits would be muted compared with some of the more involved policy proposals. International reference pricing for some drugs in Medicare Part B is one example,” notes Fitch.

For more information on the healthcare segment, 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.