Is There a Legitimate Case for the Healthcare Providers ETF?

Big pharma may be a healthy place to visit in 2009. Drug makers like Pfizer (PFE) have gobs of cash, a battered share price, and a wide array of potential blockbusters coming to market... not to mention a yield of nearly 8%.

Diversified health companies may be even more enticing. Abbott Labs (ABT) , for example, has revenue from the pharma sector. Yet equally important, they're a leader in the rapidly expanding medicated stent world. Meanwhile, Johnson & Johnson (JNJ) is currently at one of its lowest "valuation" prices ever, and few doubt its viability as a triple-A rated stock for more than 60 years.

What's more, if you read up on biotech, one of 2008's few brighter spots, you'll see Gilead (GILD) leading the way on HIV/AIDS and Genentech (DNA) is creating small miracles in cancer treatment. While the broad market is down 40% or more, biotech has managed to hold on with less than 14% losses this year.

It's no secret that healthcare providers in the Dow Jones Healthcare Provider Index Fund (IHF) have struggled all year long, down 45% YTD. And many surmise the under-performance may have been due to fears of government intervention that would sap profitability.

Yet are those fears overblown? Even if government-funded healthcare programs translated into higher taxes, does this mean the WellPoints (WLP) and United Healthcares (UNH) of the world would make poor investments?

Here's my take: When Obama takes office, he will need to tackle the budget deficit, the financial crisis and the economy first. Energy independence and wars abroad also require attention. And that may put wholescale health-care reform on the back burner.

But not entirely. Any effort to increase the number of insured individuals would increase the number of managed care enrollees. That could help companies like Wellpoint and United Healthcare.

Nevertheless, I still have trouble seeing the narrow Healthcare Providers Index Fund (IHF). There are too many uncertainties. After all, gambling on the smaller sub-segment doesn't seem sensible when a broader health care ETF in Vanguard Healthcare (VHT) would certainly do.

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Comments

[Donald Johnson:]

Although I wrote months ago that health executives weren't very concerned about the elections, I think they have to be now.

Many health stocks are depressed and they will be until the uncertainty about Obama's proposed nationalizing of the health insurance markets is resolved. We don't know exactly what he'll try to get through Congress. And we don't know whether the GOP will be able to kill or modify Obama's plans. Clinton had basically the same majorities in the House and Senate that Obama will have, and he couldn't get Hillary care enacted.

The public mood, of course, is much different today. Insurers shoot themselves in the foot every day, and consumers and politicians are sick of them. They are much harder to defend today than they were in '93 and '94. So I think enough GOP senators will support Obama to get something done.

But the markets aren't sure, yet. Uncertainty is a market killer.

In addition, with higher co-pays and deductibles, the health insurance and health care markets are acting much more like normal markets despite all of the governmental distortions.

This is hurting demand for insurance, medical devices and medical services. This is shown in the depressed prices of hospital company stocks.

So, if you're going to play the health ETFs, play the technicals as much as the fundamentals, which are very cloudy at this point, imo.

2008 Dec 30 09:39 PM