Last year and to start 2020, managed care providers and ETFs, such as the SPDR S&P Health Care Services ETF (NYSEArca: XHS), were stung by political headwinds caused by the Medicare for All debate.
XHS 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.
With former Vice President Joe Biden seemingly the presumptive Democratic presidential nominee, the political pressure previously endured by XHS is easing.
“Investor concerns over political headwinds, including ‘Medicare for All’ proposed by progressive Democratic Party candidates, compressed relative forward price-to-earnings for Health Care Services companies two standard deviations below its 10-year average over the past one-year period,” said Matthew Bartolini, head of SPDR Americas Research, State Street Global Advisors, in a recent note.
Examining XHS
Previously, XHS was dogged by speculation that Medicare For All could become a reality if Democrats win the White House in 2020. XHSis a traditional index fund that targets U.S. equities in the healthcare providers sector. Specifically, the ETF provides exposure to U.S. companies from health insurance, diagnostics, and specialized treatment.
“However, this political overhang is abating as the moderate candidate, former Vice President Joe Biden, emerged as the Democratic Party frontrunner after Super Tuesday,” said Bartolini. “Biden’s plan of expanding the Affordable Care Act would be much less disruptive to the Health Care business model and profitability than Medicare for All and relieves pressure on industry valuations.”
Healthcare stocks, at least for now, have appeared to shake out of the politically-induced doldrums seen earlier this year and XHS’s compelling growth/value mix could prove attractive over the near-term.
Beyond politics, healthcare services earnings growth is expected to be stronger than that of the broader sector this year and XHS is also positioned as a play on COVID-19 response efforts.
“To combat the coronavirus pandemic, we are likely to see increasing demand and government spending on Health Care Services, including lab testing, pharmaceutical benefits, and health care facilities,” according to Bartolini. “While analysts have been slashing the earnings estimates of the broader market since the outbreak of COVID-19, earnings prospects in the Health Care sector and Health Care Services industry remain solid and are expected to outpace the broader market in 2020.”
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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.
