How a Biden-Trump rematch can keep healthcare ETFs afloat this election year

By Isabel Wang

Healthcare ETFs are losing momentum at the start of the second quarter. Here's where strategists see them going as a Biden-Trump rematch looms.

Hello! This is MarketWatch reporter Isabel Wang bringing you this week's ETF Wrap. In this week's edition, we look at healthcare ETFs, which have taken a breather at the start of April, pausing their robust first-quarter rally. Some healthcare equity strategists also share their takes on why they see the lagging sector catching a break in this election year.

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U.S. healthcare stocks are facing challenges in maintaining their upward momentum in the first trading week of the second quarter, as a relentless first-quarter rally for some of the hottest pharmaceutical names has proved fleeting.

The Health Care Select Sector SPDR ETF XLV - which tracks companies ranging from drugmakers like Eli Lilly & Co. (LLY) and Pfizer Inc. (PFE) to insurers like UnitedHealth Group Inc. (UNH) - has fallen 3.9% so far this week, on pace for its worst weekly performance since August 26, 2022, when the fund declined by 4.2%, according to Dow Jones Market Data. The S&P 500 healthcare sector XX:SP500.35 has been the worst performer among the S&P 500's 11 segments this week, down nearly 4% through Thursday while the index overall was off 2%, according to FactSet data.

See: Why the CMS' Medicare Advantage rate is hurting stocks of Humana, UnitedHealth

Some healthcare names are on pace to erase their gains after a strong start to the year, especially those providing Medicare Advantage plans. The Centers for Medicare and Medicaid Services on Monday announced a payment rate that disappointed investors looking for a larger increase, sending shares of UnitedHealth, Humana Inc. (HUM) and CVS Health Corp. (CVS) falling amid worries about a squeeze on margins next year. Humana, which gets most of its revenue from Medicare, on Tuesday saw its shares fall to their lowest level in four years, according to FactSet data.

The market's disappointment with the government's decision not to revise its 2025 Medicare payment proposal, as well as a pause in the previously "massive" weight-loss drug stock rally, are among the reasons behind "the amplified downtick" in the healthcare sector this week, said Damien Conover, director of healthcare equity strategy at Morningstar Research Services.

Investors flocked to pharma giants Eli Lilly and Novo Nordisk A/S (NVO) at the start of 2024 on bets that demand for their anti-obesity drugs would explode, sending their shares to stratospheric levels in the first quarter. The healthcare sector witnessed six straight weeks of inflows in January and early February, according to Jill Carey Hall, equity strategist at BofA Global Research.

The S&P 500 healthcare sector advanced 8.4% in the first quarter of 2024, posting its best quarter since late 2022 and its best start to a year since 2013, according to Dow Jones Market Data.

What's more, political turmoil and policy uncertainty tend to weigh on healthcare stocks in presidential-election years, making this traditionally defensive sector less appealing as investors speculate how healthcare policy may change under a new presidency.

Historically, healthcare stocks tend to underperform as investors anticipate overhauls in the U.S. healthcare system, then recover once policy is enacted, said Andy Acker and Daniel Lyons, portfolio managers on the healthcare and biotech teams at Janus Henderson Investors.

For example, the sector lagged the broader stock market in the months leading up to the passage of the Affordable Care Act in March 2010, only to outperform in subsequent years as investors realized the reform law - which helped millions of Americans obtain insurance - came with more net benefits for the industry than costs (see chart below).

But that won't be the case in 2024 as a rematch is set up between incumbent Joe Biden and Republican challenger Donald Trump. Major new ideas in healthcare have so far not been among the candidates' campaign talking points, Acker and Lyons said in a Tuesday client note.

Biden successfully passed the Inflation Reduction Act in 2022, which allowed the government to negotiate prices for some drugs in Medicare and capped out-of-pocket drug spending for seniors, while Trump has resumed his criticism of the Affordable Care Act but has yet to propose an alternative to the legislation.

A lack of discussion of "wholesale change" or "big ideas" in the presidential candidates' campaigns could point to less uncertainty and volatility for healthcare stocks, Acker and Lyons said. The S&P 500 healthcare sector has risen 4.1% so far this year, while the S&P 500 SPX as a whole is up 7.9% over the same period, according to FactSet data.

Healthcare valuations look attractive

Conover at MorningStar said the healthcare sector is still undervalued compared to the overall equity market, despite a relentless rally for some pharmaceutical names in the first quarter.

"The market is underappreciating a lot of the innovation that's going on, both in the pharmaceutical side and in the [medical] device side," he told MarketWatch in a phone interview on Thursday.

For example, within the biotech and drug-manufacturing subsectors, the market is not fully pricing in the innovation in several therapeutic areas such as oncology, immunology and rare diseases. Also, in the device and diagnostic industries, Conover and his team see "compelling valuations" that have fallen since a period of over-optimism during the peak of the COVID-19 pandemic, he wrote in a Wednesday report.

As usual, here's your look at the top- and bottom-performing ETFs over the past week through Wednesday, according to FactSet data.

The good...

   Top performers                                                                                                                                                                        % Performance 
   Amplify Junior Silver Miners ETF                                                                                                                                                      13.7 
   Global X Silver Miners ETF                                                                                                                                                            13.4 
   Sprott Uranium Miners ETF                                                                                                                                                             11.3 
   Global X Uranium ETF                                                                                                                                                                  9.9 
   iShares Silver Trust                                                                                                                                                                  9.9 
   Source: FactSet data through Wednesday, April 3. Start date March 28. Excludes ETNs and leveraged products. Includes NYSE-, Nasdaq- and Cboe-traded ETFs of $500 million or greater. 

... and the bad

   Bottom performers                                  %Performance 
   ProShares Bitcoin Strategy ETF                     -7.6 
   ARK Genomic Revolution ETF                         -5.1 
   PIMCO 25+ Year Zero Coupon US Treasury Index ETF   -4.9 
   Vanguard Extended Duration Treasury ETF            -4.4 
   ARK Innovation ETF                                 -4.4 
   Source: FactSet 

New ETFs

Strategas Asset Management on Thursday launched the actively managed Strategas Macro Momentum ETF SAMM. The fund is designed to be "more sensitive" to the current market cycle - seeking and exploiting the market's momentum impulse wherever it's found, the firm said in a press release.Rayliant Global Advisors announced Thursday that it has partnered with Sumitomo Mitsui DS Asset Management to launch the Rayliant SMDAM Japan Equity ETF RAYJ. The fund aims to identify Japanese firms with "sustainable, high-quality growth" that could benefit investors seeking an exposure to one of the world's largest economies, the company said in a press release.ProShares on Tuesday launched the ProShares Ultra Bitcoin ETF BITU, the first ETF to target 2x daily bitcoin returns, and the ProShares UltraShort Bitcoin ETF SBIT, the first ETF to inversely target -2x daily bitcoin returns, it said. Both funds have an expense ratio of 0.95%, the company said on its website.Allianz Investment Management LLC on Monday announced the launch of its AllianzIM U.S. Equity Buffer15 Uncapped ETF series, starting with the AllianzIM U.S. Equity Buffer15 Uncapped Apr ETF ARLU. The new ETF series is designed to offer investors a 15% downside buffer over a specific one-year outcome period, the company said on Monday.

Weekly ETF Reads

Rising bond yields haven't kept tech stocks from outperforming - and have created this buying opportunity, says BlackRock (MarketWatch)Fidelity's new service charge poses 'existential' threat to some ETFs (MarketWatch)Outperforming ETF manager names a potential '50-bagger' in the stock market (MarketWatch) Europe equities are too cheap to ignore (Financial Times) Billions Flood Active ETFs in Hunt for Cheap EM Stocks (Bloomberg)Top- and Bottom-Performing Stock ETFs for the Quarter (MorningStar)

-Isabel Wang

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04-06-24 0530ET

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