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Healthcare ETFs in Focus on Obamacare Replacement Plan

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Healthcare was the top-performing sector of February and is in the spotlight given President Donald Trump’s healthcare overhaul efforts. Trump promised to reduce federal regulations by 75–80% and streamline the Food & Drug Administration (FDA) approval process. This will make it easier for biotech and pharma companies to introduce products to the market (read: Hit ETFs & Stocks from the Top Sector of February).

The major reform will likely repeal and replace the Affordable Care Act, also known as Obamacare that has been grabbing eyeballs of investors since the election. This is because Trump has prioritized healthcare reform over tax reform. Finally, House Republicans have released the long-awaited bill to repeal and replace Obama's signature healthcare law last evening. This will unwind much of the law over the next three years.

The overall cost and number of Americans to be covered under the proposed Republican plan is still unclear. Also, the fate of the bill is uncertain. The bill requires passage by the House of Representatives and Senate before it goes to Trump for his signature.

Inside The Proposed Bill

First, the bill calls for replacing income-based tax credits with refundable age-based tax credits for affordable insurance. Second, it would stop Medicaid expansion, the insurance program for the poor, starting from January 1, 2020, and cap Medicaid funding after that date. Medicaid will be converted from an open-ended entitlement to a per-capita system, where states are given a set amount for the number of people in categories including disabled, elderly, childless adults and pregnant mothers.

Third, the bill would immediately stop the requirement of individuals having insurance coverage and businesses offering coverage to their workers. Fourth, it expands the allowable size of healthcare savings accounts that can be coupled with high-deductible insurance plans, up to $6,550 for an individual or $13,100 for a family (read: Trump Sets Bullish Tone: Grab These Top-Ranked ETFs).

Further, the bill aims at maintaining coverage for people with pre-existing conditions and allowing children to stay on their parents' plans till the age of 26. However, the proposal also allows insurers to charge higher premiums of 30% to those who let their coverage lapse.

With the proposal on the table, the White House press secretary, Sean Spicer views the move as an important step toward restoring healthcare choices and affordability back to the Americans.

Who Will Benefit & Who Will Lose?

While Obamacare helps larger number of Americans to get health insurance and affordable medicines, skyrocketing premiums have annoyed Americans too. The replacement of the plan would hurt hospitals and insurers, while pharma and biotech stocks could be the winners (read: Biotech ETFs Powered by Q4 Earnings).

As such, SPDR S&P Health Care Services ETF (XHS - Free Report) and iShares U.S. Healthcare Providers ETF (IHF - Free Report) might see rough trading if Obamacare gradually dismantles. XHS tracks the performance of companies in healthcare services, healthcare facilities, managed healthcare and healthcare distributors, while IHF offers exposure to companies that provide health insurance, diagnostics and specialized treatment. Both ETFs gained 20.4% and 16%, respectively, since election and have a Zacks ETF Rank of 3 or ‘Hold’ rating.

Coming to pharma and biotech, the ETF will not only benefit from the Obamacare overhaul but also from the other policies like faster drug approval process, tax cuts and cash repatriation. That said, investors could definitely tap the upcoming boom in the basket form with the bunch of ETFs. These include PowerShares Dynamic Pharmaceuticals Fund (PJP - Free Report) , iShares U.S. Pharmaceuticals ETF (IHE - Free Report) ,SPDR S&P Pharmaceuticals ETF (XPH - Free Report) , VanEck Vectors Pharmaceutical ETF (PPH - Free Report) , iShares Nasdaq Biotechnology ETF (IBB - Free Report) ,SPDR S&P Biotech ETF (XBI - Free Report) ,VanEck Vectors Biotech ETF (BBH - Free Report) andFirst Trust NYSE Arca Biotechnology Index Fund FBT. All these funds have a Zacks ETF Rank of 3 (see: all the Healthcare ETFs here).

Investors seeking to leverage their risk from a particular corner of the healthcare space could also find iShares U.S. Healthcare Providers ETF (IHF - Free Report) , Health Care Select Sector SPDR Fund (XLV - Free Report) , First Trust Health Care AlphaDEX Fund FXH, Vanguard Health Care ETF (VHT - Free Report) and iShares U.S. Healthcare ETF (IYH - Free Report) compelling choices. All these funds have a Zacks ETF Rank of 3.

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