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ETFs to Gain on UnitedHealth and Change Healthcare Deal

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The largest U.S. health insurer UnitedHealth Group (UNH - Free Report) agreed to buy Change Healthcare (CHNG - Free Report) for $7.84 billion in cash. The total deal is valued at $13 billion, including more than $5 billion in debt. Per the terms of the deal, UnitedHealth will pay $25.75 per Change Healthcare share, a premium of 41.2% to the Jan 5 closing price.

The deal will combine Change Healthcare with UnitedHealth’s OptumInsight unit to offer software, data analytics, technology and other services to the health care industry, the companies said. The combination will help simplify services around medical care to improve health outcomes and lower costs (see: all the Healthcare ETFs here).

The transaction, which is expected to close in the second half of 2021, is awaiting approvals from shareholders and regulators. The transaction would boost UnitedHealth's net earnings per share by 20 cents in 2022 and adjusted earnings per share by 50 cents.

The proposed acquisition is the second major healthcare deal to start the New Year and came following the Centene (CNC - Free Report) buyout of Magellan Health (MGLN - Free Report) for $2.2 billion.

Market Impact

Following the news, shares of UnitedHealth gained 4.2% at the close on the day while shares of CHNG soared 30%. Investors seeking to tap the upcoming growth of UnitedHealth through this potential acquisition could bet on ETFs having substantial exposure to the health insurer. We have highlighted them in detail below:

iShares U.S. Healthcare Providers ETF (IHF - Free Report)

This ETF follows the Dow Jones U.S. Select Healthcare Providers Index with exposure to companies that provide health insurance, diagnostics and specialized treatment. In total, the fund holds 57 securities in its basket and UNH occupies the top position with 22.3% share. The fund has amassed $1.1 billion in its asset base, while volume is light at about 35,000 shares per day, on average. It charges 42 bps in annual fees and has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook (read: ETFs to Watch Ahead of Georgia Senate Runoff).

iShares Evolved U.S. Healthcare Staples ETF (IEHS - Free Report)

This actively managed ETF employs data science techniques to identify companies with exposure to the health-care staples sector. It holds 161 stocks in its basket with UnitedHealth taking the top spot at 11.3%. The fund has accumulated $18.6 million in its asset base and sees a meager volume of 6,000 shares. It charges 18 bps in annual fees.

Health Care Select Sector SPDR Fund (XLV - Free Report)

The most popular health care ETF, XLV follows the Health Care Select Sector Index. This fund manages nearly $25.6 billion in its asset base and trades in heavy volume of around 8.7 million shares. Expense ratio comes in at 0.13%. In total, the fund holds 63 securities in its basket with UNH taking the second spot at 7.7% of the assets. Pharma accounts for 28.7% share from a sector look, while health care equipment and supplies, health care providers and services, and biotech have a double-digit exposure each. It has a Zacks ETF Rank #2 (Buy) with a Medium risk outlook.

iShares U.S. Healthcare ETF (IYH - Free Report)

This fund offers exposure to 123 U.S. healthcare equipment and services, pharmaceuticals, and biotechnology companies by tracking the Dow Jones U.S. Health Care Index. Here again, UnitedHealth is the second firm accounting for 6.9% of the total assets. In terms of industrial exposure, pharma takes the top spot at 26.8%, followed by health care equipment (25.2%) and biotech (16.8%). The product has amassed $2.5 billion in its asset base, while charging 43 bps in annual fees. It trades in moderate volume of around 35,000 shares a day and has a Zacks ETF Rank #2 with a Medium risk outlook (read: Top-Performing Biotech ETFs Amid the COVID-19 Crisis).

Vanguard Health Care ETF (VHT - Free Report)

This ETF tracks the MSCI US Investable Market Health Care 25/50 Index and holds 458 stocks in its basket. Of these, UNH takes the second spot with 6.3% allocation. Pharma takes the largest share at 24.8%, while health care equipment and biotech round off the top three spots. VHT is also one of the popular and liquid ETFs with AUM of $13.2 billion and an average daily volume of about 255,000 shares. It charges 10 bps in annual fees and has a Zacks ETF Rank #2 with a Medium risk outlook.

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