The iShares U.S. Healthcare Providers ETF (NYSEArca: IHF) is up more than 17% over the past 90 days, but the fund isn’t necessarily getting the coronavirus lift other healthcare ETFs are enjoying.
In fact, IHF may actually be benefiting from another scenario forced by the pandemic: patients staying away from hospitals and doctors officers – when they can – and putting off procedures. That’s good news for health insurance companies. That trend is positioning IHF components to be a source of strength when second-quarter earnings reports start trickling in over the next few weeks.
“If analyst estimates are to be believed, industry bellwether UnitedHealth Group Inc. is poised to show record-high adjusted earnings per share when it becomes the first in the group to report quarterly results on July 15. Record-breaking profit reports may be in store for Anthem Inc. and Centene Corp. as well,” according to Bloomberg.
IHF is 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.
Focus on the Ratio
The medical loss ratio – a gauge of how much an insurance premium is allocated to paying medical providers – is integral in measuring the earnings power of IHF member firms and it could reach a low point in the April through June period. Like a golf score, the lower the better for that ratio.
Previously, investors embraced healthcare stocks for the sector’s growth and defensive characteristics, providing investors with yields and valuations that are less stretched than other yield-producing stocks like utilities. However, the managed care group is betraying that defensive reputation as investors sell IHF components amid intensifying political conjecture and concerns that hospital costs are rising, a scenario that also pressures managed care firms.
“Separately, Goldman Sachs analyst Robert Jones, who started coverage on the sector in June, said with managed care companies trading at historical lows on a price to earnings basis, and muted political risks, ‘this could be an opportunity to buy the stocks,’” reports Bloomberg.
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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.