The healthcare sector is subject to political muscle flexing this election cycle as no matter which side wins, varied policies and reforms are lined up for the sector. Obamacare and lowering drug prices are the key areas of focus.
Below, we detail the proposed policies by Hillary Clinton and Donald Trump and their impact on the ETF world:
The fate of Obamacare largely hinges on the outcome of the 2016 presidential election.
This is especially true as Hillary Clinton is a huge supporter of the Affordable Care Act (Obamacare) and promises to expand it further. She aims to cut out-of-pocket costs for prescription drugs and expand patient coverage to uninsured families, regardless of immigration status. If Clinton wins, Obamacare will stay and iShares U.S. Healthcare Providers ETF (IHF - Free Report) offering exposure to companies that provide health insurance, diagnostics and specialized treatment, will thrive. The ETF has shed over 8% so far this year and has a Zacks ETF Rank of 2 or ‘Buy’ rating (read: Prepare for a Clinton Presidency with These Stocks & ETFs).
On the other hand, Republican Donald Trump vowed to repeal and replace Obamacare with Health Savings Accounts (HSAs) and a series of proposals encouraging free-market competition. These include encouraging the sale of insurance policies across state lines, and making individual health insurance premium payments fully tax deductible. This reform could benefit many “swing states” as Obamacare premium has risen by an average of 25% and in some cases as high as 100% given that the fourth enrollment period effective this month.
However, repealing Obamacare would raise the number of Americans without insurance by 24 million and increase the deficit by $137 billion over 10 years, according to a June 2015 report by the nonpartisan Congressional Budget Office. This could negatively impact SPDR S&P Health Care Services ETF (XHS - Free Report) , which tracks the performance of companies in healthcare services, healthcare facilities, managed healthcare and healthcare distributors. The ETF has lost 15.7% in the year-to-date timeframe and has a Zacks ETF Rank of 2 or ‘Buy’ rating (read: Trump Healthcare Reforms: Will ETFs Gain Health or Suffer?).
Drug pricing has garnered a lot of investor attention over the past one year especially after Clinton’s tweet last September on "price gouging" that led to a blood bath in biotech stocks and eroded about $40 billion in market value in a single trading day. Clinton promised to curb the fast-rising prices of specialized drug treatments and has called for increased regulatory scrutiny that will likely pressure profits margins of biotech and drug companies.
Notably, biotech ETFs – iShares Nasdaq Biotechnology ETF (IBB - Free Report) ,SPDR S&P Biotech ETF (XBI - Free Report) ,VanEck Vectors Biotech ETF (BBH) andFirst Trust NYSE Arca Biotechnology Index Fund (FBT - Free Report) –have been the worst performer in the broad healthcare space this year and will continue to decline if Clinton moves to the White House. All these ETFs have shed more than 20% in the year-to-date timeframe and have a Zacks ETF Rank of 3 or ‘Hold’ rating (read: ETFs to Play as Biotech Juggles Election & Earnings).
Trump on the other hand is promoting pharmaceutical cost reduction through free-market principles. These include removing barriers to entry for drug providers as long as they are deemed safe and reliable, allowing the import of low-cost prescription drugs from overseas, and price transparency from all healthcare providers. Import of cheap drugs from other countries and price transparency would no doubt make healthcare more affordable to Americans.
However, it will lead to an increase in competition, counterfeit drugs, and substandard treatment in the country. Plus, drug re-importation could hurt the profit margins of U.S. pharma companies. As a result, pharma ETFs – PowerShares Dynamic Pharmaceuticals Fund (PJP - Free Report) ,iShares U.S. Pharmaceuticals ETF (IHE),SPDR S&P Pharmaceuticals ETF (XPH - Free Report) and VanEck Vectors Pharmaceutical ETF (PPH - Free Report) will be impacted more. XPH has been lagging the pharma space, having plunged over 23% in the year-to-date timeframe, followed by declines of 19.41% for PJP, 18.3% for PPH and 15.7% for IHE. While PJP has a Zacks ETF Rank of 3, the others have a solid Zacks ETF Rank of 2 or ‘Buy’ rating (read: Will a Clinton Presidency Spell Doom for Pharma ETFs?).
Should You Buy or Sell?
Given high uncertainty surrounding the elections, healthcare has been the worst performing sector of this year, losing 7.7% compared to the gain of 2% for the S&P 500. This has made healthcare stocks extremely cheap at the current levels with a P/E ratio of 19.1, down from 22.5 a year ago, as per the Wall Street Journal. While biotech and pharma stocks have been the worst hit, defensive names and dividend healthcare stocks have gained traction.
Whatever be the outcome of the election, the healthcare sector seems to be an attractive buying opportunity on depressed valuations. This is especially true as the stocks look to rally after the elections if history is any guide. Healthcare stocks have declined ahead of the past four elections and then rallied 10–15% over the three months from the Election Day. A similar trend has been witnessed so far in this cycle (see: all the Healthcare ETFs here).
Given this, investors could tap the beaten down sector with cheap healthcare ETFs heading into the Election Day for handsome returns. A broad exposure across several industries could also lead a winning situation. Some of the top ranked ETFs include Health Care Select Sector SPDR Fund (XLV - Free Report) , Vanguard Health Care ETF (VHT - Free Report) ,PowerShares Dynamic Healthcare Sector Portfolio (PTH - Free Report) andiShares U.S. Healthcare ETF (IYH - Free Report) , each with a Zacks ETF Rank of 1 or ‘Strong Buy’.
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