ETF Sector Roundup: Stalling Health-Care Reform

The health-care reform saga rolls on. Those hoping for clarity out of Washington following last week's bipartisan Healthcare Summit were probably disappointed at what essentially amounted to seven hours of nationally televised political theatre.

In case you missed it, here's a quick recap: A bipartisan compromise appears even less likely than before. In short, Republicans, imploring the president and Congress to scrap the bill and start from scratch, refused to back the proposed Democratic bill, citing the overall cost of the bill, the lack of tort reform, and sweetheart deals cut with certain states.

With health-care reform back in the spotlight, many are taking the opportunity to evaluate their exposure to the sector. As it has done for most domestic-equity sectors, the exchange-traded fund industry has done a good job of carving up health care. Along with health-care sector funds, we also have several industry and subindustry funds at our disposal. Let's take a look at some of our options. Of course, this is only an introduction. For more information about any of the funds mentioned or to learn more about an ETF's sensitivity to potential reform, we encourage readers to click through and check out the Analyst Reports.

The tremendous uncertainty that continues to hang over the sector can make it extremely difficult to develop the conviction to make focused bets within one's portfolio. For those in this crowd who still wish to add some health-care exposure to their portfolio, broadly diversified sector ETFs are the way to go. But it still pays to know what you own; the industry breakdowns can vary widely from fund to fund. The table below shows the industry exposures offered by four of the most popular health-care ETFs.

Broad Healthcare Sector ETFs: Industry Breakdowns (%)

  Pharma Biotech Healthcare Equipment & Supp Providers & Services (MCOs) Life Sciences Tools & Services iShares DJ US Hcare (IYH) 45.7 14.7 19.8 15.6 (7.5) 4.2 Health Care Slct Sect (XLV) 49.9 13.0 15.9 17.7 (8.2) 3.2 Vanguard Hlth Care (VHT) 43.4 14.2 18.8 18.1 (7.0) 4.4 iShares S&PGlblHcare (IXJ) 65.3 9.2 11.4 11.3 (4.8) 2.5

 

We've highlighted each fund's exposure to managed-care organizations, or MCOs, for your reference, as this continues to be one of the most vulnerable subsectors to potential reform.

Of course, there are folks out there who view this period of uncertainty as a tremendous opportunity. While there aren't any pure-play managed-care ETFs out there, investors could consider a couple of funds that focus on health-care providers and services (that is, MCOs, hospitals, laboratories, distributors, etc.). Notice the subindustry breakdowns in the table below.

Providers & Services ETFs: Subindustry Breakdowns (%)

  Managed Health Care Health Care Facilities Health Care Distributors Health Care Services Life Sciences Tools & Services iSharesDJUSHcareProv (IHF) 42.9 12.2 0.5 38.7 4.9 PowerSh DynHCSer (PTH) 21.4 22.0 17.0 36.2 0.0

 

Understanding the various exposures offered by each health-care ETF is a great place to start. The goal is always to most accurately match our thesis with the proper tool. For those looking to dig a bit deeper, the following tables might be handy resources. Along with the makeup of the portfolios, investors might also evaluate the general portfolio characteristics, fair value analysis, and performance records for these potential investments.

Healthcare ETFs: Size Profiles

  Expense Ratio Avg. Mkt Cap ($Bil) Large Cap % Mid Cap % Small Cap % Broad Sector:           Health Care Select Sect SPDR (XLV) 0.21 46.38 89.75 10.25 0.00 iShares DJ US Healthcare Prov (IYH) 0.48 34.04 80.12 15.85 4.02 Vanguard Health Care ETF (VHT) 0.25 27.20 75.63 16.26 8.10 iShares S&P Global Healthcare (IXJ) 0.48 48.64 91.56 8.26 0.17 Pharmaceuticals:           Pharmaceutical HOLDRs    74.73 91.64 8.36 0.00 iShares DJ US Pharma (IHE) 0.48 12.59 48.31 27.68 24.01 SPDR S&P Pharmaceuticals (XPH) 0.36 5.04 28.87 29.93 41.21 PowerShares Dynamic Pharma (PJP) 0.60 11.13 52.41 24.24 23.35 Biotechnology:           iShares Nasdaq Biotechnology (IBB) 0.48 6.02 40.39 33.42 26.19 Biotech HOLDRs    30.78 92.13 6.45 1.42 SPDR S&P Biotech (XBI) 0.35 3.10 18.82 38.66 42.52 PowerShares Dyn Bio&Genome (PBE) 0.60 2.31 14.79 37.28 47.92 First Trust NYSE Arca Biotech (FBT) 0.60 4.04 25.92 49.91 24.17 Specialty:           iShares DJ US Medical Devices (IHI) 0.48 5.17 44.77 23.48 31.75 iShares DJ US Hcare Provider (IHF) 0.48 7.63 47.93 31.79 20.28 PowerShares Dyn Hcare Serv  0.60 3.07 24.38 33.78 41.83

 

Healthcare ETFs: Fair Value Analysis

  P/FV Fair Value Uncertainty Wide Moat % Narrow Moat % No Moat % Broad Sector:           Health Care Select Sector SPDR (XLV) 0.82 Medium 64.09 30.78 4.44 iShares DJ US Healthcare Prov (IYH) 0.84 Medium 58.09 29.24 8.95 Vanguard Health Care ETF (VHT) 0.84 High 53.27 30.32 9.89 iShares S&P Global Healthcare (IXJ) 0.88 Medium 50.21 18.91 2.67 Pharmaceuticals:           Pharmaceutical HOLDRs  0.83 Medium 69.38 12.30 0.56 iShares DJ US Pharma (IHE) 0.91 High 46.74 25.13 17.60 SPDR S&P Pharmaceuticals (XPH) 0.99 High 28.40 34.71 17.92 PowerShares Dynamic Pharma (PJP) 0.93 High 41.14 32.23 12.50 Biotechnology:           iShares Nasdaq Biotechnology (IBB) 0.98 High 15.75 35.72 28.22 Biotech HOLDRs  0.93 High 58.06 29.65 7.60 SPDR S&P Biotech (XBI) 0.94 Very High 11.36 14.75 45.75 PowerShares Dyn Bio&Genome (PBE) 1.00 Very High 14.13 14.69 42.75 First Trust NYSE Arca Biotech (FBT) 0.96 Very High 14.97 21.03 50.29 Specialty:           iShares DJ US Medical Devices (IHI) 0.94 Medium 40.26 24.72 12.29 iShares DJ US Hcare Provider (IHF) 0.86 High   52.51 27.42 PowerShares Dyn Hcare Serv  0.97 High 2.91 39.57 31.12

 

Healthcare ETFs: Performance and Risk

  YTD Returns 1 Yr Returns 3 Yr Returns* Std. Dev 1 Yr Sharpe Ratio, 1 Yr Broad Sector:           Health Care Select Sect (XLV) 2.03 40.85 -0.01 12.13 2.84 iShares DJ US Healthcare (IYH) 2.04 41.99 0.78 11.81 2.97 Vanguard Health Care (VHT) 2.05 43.36 0.71 11.46 3.11 iShares S&P Global Hcare (IXJ) -0.48 43.72 -1.28 11.38 2.99 Pharmaceuticals:           Pharmaceutical HOLDRs  -0.97 40.57 0.08     iShares DJ US Pharma (IHE) 1.06 54.04 4.23 15.40 2.85 SPDR S&P Pharmaceuticals (XPH) 3.65 56.78 5.72 14.80 3.05 PowerShares Dyn Pharma (PJP) 3.43 44.60 3.11 12.75 2.87 Biotechnology:           iShares Nasdaq Biotech (IBB) 6.82 38.59 5.09 16.86 1.89 Biotech HOLDRs  5.66 23.54 5.46     SPDR S&P Biotech (XBI) 10.50 28.48 8.38 22.06 0.98 PowerSh DynBio&Genome (PBE) 11.11 49.15 1.91 19.27 1.95 First Trust NYSE Arca Biotech (FBT) 16.74 83.19 13.97 28.74 2.08 Specialty:           iShares DJ US Medical Dev (IHI) 6.34 61.08 2.90 12.31 3.79 iShares DJ US Hcare Prov (IHF) 2.87 65.32 -3.69 14.04 3.63 PowerShares Dyn Hcare Serv  1.18 45.86 -8.35 11.39 3.32

*annualized
Data through Feb. 26, 2010

 

The Democrats are likely to try to push a bill through the Senate on reconciliation, a budgetary tactic, which is essentially an end-around on filibusters that requires only 51 votes--rather than the usual 60. If health reform is abandoned now, the chances of Obama pursuing comprehensive reform again in his first term plummet further yet. Keep in mind that he'll be facing a slimmer congressional majority. If they don't go the reconciliation route, our equity analysts expect only very minor health-care legislation for a long time.

 

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