Healthcare Services ETFs Could Continue to Rally

Hospital stocks and sector-related exchange traded funds are outperforming this year after the coronavirus pandemic forced many institutions to make drastic changes that will help boost long-term profits.

Year-to-date, the iShares U.S. Healthcare Providers ETF (NYSE: IHF) is up 13.1% and the SPDR S&P Health Care Services ETF (NYSEArca: XHS) 18.6%. Meanwhile, the broader Health Care Select Sector SPDR ETF (NYSEArca: XLV) is 10.5% higher.

Covid-19 dealt a huge dent to hospitals financially as many had to push off high-margin elective procedures to accommodate the surge in infections. While some took large government grants to ease the losses, many hospitals have made changes that were already underway at publicly traded operators, which have helped bolster margins by shifting services to lower cost outpatient centers, selling off less profitable assets, and cutting costs, the Wall Street Journal reports.

What looked like a recovery rally for hospital stocks could now be the start of longer lasting momentum, according to analysts and industry investors. Additionally, rebounding patient volumes are combining with longer-term initiatives to secure more profitable care.

“There is generally a sense that volumes have rebounded but that there is still further room to run,” Credit Suisse analyst A.J. Rice told the WSJ.

For example, Tenet has cut some traditional acute-care hospitals in favor of growing outpatient surgical centers.

“They’ve been focusing on core markets where they have a strong presence,” Larry Robbins, chief executive of Glenview Capital Management, told the WSJ.

Outpatient surgery centers handle procedures like knee and hip replacements and can provide lower costs than traditional hospitals.

“It is getting no recognition in our view that a third of the business and the fastest-growing part of the business is in surgery centers,” Rice added.

Furthermore, the Biden Administration’s support of the Affordable Care Act, or Obamacare, has also been favorable for hospitals, since the program helps provide coverage for patients who would otherwise struggle to pay for their medical bills. The Supreme Court also recently upheld the law after challenges from several Republican-leaning states.

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