Health Care Sector ETFs May Not Be so Defensive This Time Around

Health care stocks and sector-related exchange traded funds have been a defensive play during many periods of market weakness, but the problems posed by the coronavirus pandemic has created some new issues that are not so easily brushed off.

The Health Care Select Sector SPDR ETF (NYSEArca: XLV) dipped 1.6% year-to-date while the S&P 500 Index fell 9.2%.

Some sub-sectors within the broader health care sector have stood out during the COVID-19 pandemic, including big drugmakers and insurers. However, every recession is different, and this new coronavirus pandemic has caused a dramatic disturbance that does not mirror previous downturns.

For instance, elective surgeries have come to a halt, ending a key profit center for hospitals and the companies that supply needed devices, drugs, and surgical tools, the Wall Street Journal reports.

The disruption may continue to pose a long-term concern for the economy, with health care accounting for nearly half of the sharp decline in the gross domestic product over the first quarter.

Additionally, according to a survey conducted by Oppenheimer, almost 80% of U.S. hospital chief financial officers said elective surgeries are on hold at their local hospital or system. Within that group, about two-thirds warned of a one to two-month hold, while the remainder anticipated a two to four month dark period.

The operational impact of lost revenue has caused severe belting tightening among these hospitals. More than half the executives highlighted staffing cuts, while nearly 80% have halted capital spending.

Over half of the respondents also revealed they had less than six months’ worth of cash on hand to keep their hospital operations going.

Johnson & Johnson also argued that while medical spending will pick up once the coronavirus blows over, but working through the backlog will still take time. The U.S. hospital system could increase surgical procedure capacity by 30% if they operated around the clock.

Drugmakers may also take a blow in the current environment. Merck & Co. cut its full-year forecast and warned of delays in patients receiving drugs that are administered by a physician, which make up for roughly two-thirds of the company’s revenue. Some hospitals have barred sales reps to contain the spread of the coronavirus, diminishing the pipeline for new drug treatments that come online.

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