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Mutual Fund Commentary

Donald Trump’s win has had a substantial positive impact on the pharmaceutical industry. While tougher action on drug pricing by Hillary Clinton had clouded the outlook for the industry this year, investors think that a Trump presidency could bring to an end the “draconian” new pricing rules on drugs in the wake of scandals over prices.

Trump’s intentions to repeal and replace Obamacare and free up cash currently held overseas for tax reasons are expected to boost the industry. Thanks to such bullish trends, it will be judicious to invest healthcare mutual funds.

What’s Behind Trump’s Win?

“I will be president for all Americans,” said Trump, after the victory in a historic but divisive presidential campaign. Trump won the required number of electoral votes in spite of Clinton’s lead by 170,000 popular votes. He won the presidency by riding an enormous wave of support among white working-class voters, which helped him triumph even in areas that supported Barack Obama in 2012.

Trump’s political ruthlessness was certainly appreciated by half of the electorate who has lately grown weary of “political correctness”. He sure had a way with his words from “Low Energy” Jeb Bush to “Little Marco” Rubio to “Lyin’ Ted” Cruz to “Crooked Hillary”. To top it, FBI’s unprecedented investigations on Clinton, did, help him secure the seat (read more: 6 Stocks to Profit from a Trump Presidency).

Drug Stocks Surge on Trump Win

Trump’s victory fueled a market sell-off across the world while biotech stock indices braved it and scaled higher. The iShares NASDAQ Biotechnology Index (IBB - Free Report) increased 1.7% to settle at 289.78 on Nov 10, while the NYSE ARCA Pharmaceutical Index gained 0.5% to close at 499.26.

The biotech index climbed from a critical support level of 250 earlier this week, which is the low end of the trading range for the index for most of this year. Whenever the index has bounced back from such a level, it has invariably resulted in an average rally of 15% this year.

Trump Victory: Big for Healthcare

The general opinion is that a Hillary Clinton win would have been a negative for pharma and biotech stocks given her stand on rising drug prices. Clinton raised quite a hue and cry last year, vehemently criticizing the sharp hike in the price of Daraprim, used to treat parasitic infections. Clinton suggested a wide range of policies to check drug prices and reduce healthcare payers’ drug costs. She also proposed reinvestment in research and development, and drug reimportation from countries that pay less for their medicine, something that didn’t bode well for the industry. 

Meanwhile, Trump remained silent on the drug pricing debate, which could mean fewer headwinds for the industry. Trump also announced plans to “repeal and replace” the Affordable Care Act, better known as Obamacare. Even though the act helps purchase insurance plans at a subsidized rate, it does levy taxes on the industry, which reduces profitability.

Trump’s business tax plan should also benefit biotech companies. He plans to trim business tax rate to 15% from 35%. The lower tax burden is expected to boost profits for large pharmaceutical companies. Such firms can, in the meantime, repatriate cash held overseas and only pay 10% tax on it, as per Trump’s policy. This extra cash can be further utilized for stock buybacks, boost earnings, pay dividends or invest in drug research (read more: 5 Top Biotech Stocks to Buy on Trump Victory).

4 Top Healthcare Mutual Funds to Buy

With pharma and biotech stocks riding high on the Trump win, it looks like a good time to invest in this industry. We have chosen four mutual funds from this industry that possess a Zacks Mutual Fund Rank #1 (Strong Buy) or 2 (Buy), have positive 3-year and 5-year annualized returns, minimum initial investments within $5000 and low expense ratios.

The question here is why should investors consider mutual funds? Reduced transaction costs and diversification of portfolios without the several commission charges that are associated with stock purchases are the primary reasons why investors should park their money in mutual funds (read more: Mutual Funds: Advantages, Disadvantages, and How They Make Investors Money).

Fidelity Select Biotechnology (FBIOX - Free Report) invests the majority of its assets in securities of companies principally engaged in the research, development, manufacture, and distribution of various biotechnological products. FBIOX invests in domestic and foreign issuers. The fund’s 3-year and 5-year annualized returns are 8.6% and 23.1%, respectively. Its annual expense ratio of 0.73% is lower than the category average of 1.3%. FBIOX has a Zacks Mutual Fund Rank #2.

Fidelity Select Health Care (FSPHX - Free Report) invests the majority of its assets in securities of companies principally engaged in the design, manufacture, or sale of products or services used for or in connection with health care or medicine. FSPHX’s 3-year and 5-year annualized returns are 11.9% and 21.1%, respectively. Its annual expense ratio of 0.72% is below the category average of 1.3%. FSPHX has a Zacks Mutual Fund Rank #2.

Schwab Health Care (SWHFX - Free Report) invests in equity securities issued by companies in the health care sector. SWHFX’s 3-year and 5-year annualized returns are 10% and 17.5%, respectively. Its annual expense ratio of 0.79% is lower than the category average of 1.3%. SWHFX has a Zacks Mutual Fund Rank #2.

Live Oak Health Sciences (LOGSX - Free Report) invests primarily in common stocks of companies engaged in the research, development, production, or distribution of products or services related to health care, medicine, or the life sciences. LOGSX’s 3-year and 5-year annualized returns are 10% and 15.8%, respectively. Its annual expense ratio of 1.08% is lower than the category average of 1.3%. LOGSX has a Zacks Mutual Fund Rank #1.

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