Scott Burns: Hi there, I'm Scott Burns, director of ETF analysis with Morningstar. Lately, the health-care sector has been on a lot of investors' minds and has really been grabbing the headlines. This really stems from moves that the Obama administration and Congress have been looking to make to help stem health-care costs.
It's clearly one of the president's initiatives, and it looks like he's getting a lot of steam with the Democratic control of both the White House and of Congress.
Now, for ETF investors, there's a lot of different ways to play this health-care space. When we look at the broad nine-sector as GICS defines it, slicing and dicing of the sector universe, we find that the health-care sector, as determined by our equity analysts, is by far the most undervalued.
Of course that undervalued nature also reflects a lot of risk. There is a lot of uncertainty right now.Read Full Transcript
One thing investors should always know is what is the composition of the ETFs they're looking to invest in. So when we look at the broad health-care sectors, investors should really know that implicit in any investment in these funds is about a two-thirds stake in pharmaceutical companies. That is two-thirds of the assets in the large, broad health-care sector funds are in pharmaceuticals.
Whether we're talking about the Health Care SPDR with the ticker XLV, or Vanguard Healthcare ETF with the ticker VHT, or the iShares S&P Global Healthcare with the ticker IXJ. Understanding that there's a large pharma stake in that is important.
Why is that so important? The pharma industry seems to be the industry with the biggest target on its back right now. One part, the president wants to allow Medicare to negotiate directly with the drug companies. This will most likely push down profits at the drug companies.
The second part of the president's plan would be to allow for the re-importation of pharmaceutical drugs. This would also have a dampening affect on a lot of original drug manufacturers' profits, but it would actually be very beneficial to generic drugmakers.
We're starting to see this real split and dichotomy. The problem is that as finely diced as the ETF universe has sliced the health-care space, we don't actually have a generic-drug maker ETF investors can invest in.
There are other options out there. Some are good. Some better for shorting, some are better for going long. If you're really worried about the uncertainty in the pharmaceutical space, we recommend that you check out the iShares' Dow Jones Healthcare Devices ETF, ticker IHI.
We think the medical devices industry is largely insulated from these reforms going on in Medicare right now. That, in fact, hospitals and other health-care providers will look to increase their usage of these cost-effective medical devices as they try to shore up their balance sheets and income statements from places that are getting hit by some of these health-care reforms.
Now, for those looking for a shorting idea, we definitely think you should take a look at the iShares Dow Jones Healthcare Providers ETF, ticker IHF. This ETF is largely composed of hospital operators.
With more and more uninsured people getting access to health-care through this plan, someone's going to have to eat the bill. It looks like it's going to be hospitals.
This sector's been under a tremendous amount of stress, so valuations are quite low. But we still think there's a lot of risk in that sector. There's a lot of leverage in that sector, and a lot of uncertainty.
Making sure you know what you own in your ETF is largely important, so please check out Morningstar's ETF research. We cover over 300 ETFs including all of the ETFs we mentioned in today's segment.
Thanks, I'm Scott Burns, director of ETF analysis with Morningstar.