It’s been a part of the national conversation for such a long time that it’s hard to believe that once President Barack Obama puts pen to paper, health care reform will be a reality. Which ETFs are in the best position to reap the benefits?
Health care reform has passed by a narrow slip. While there’s still some confusion about what it means for Americans, health care-focused ETFs have been on the upswing this morning. Tara Bernard for The New York Times reports that the legislation is meant to provide coverage for as many as 32 million people who have been shut out of the market, whether it is because of pre-existing conditions or unaffordable insurance premiums.
For people already covered by a large employer — most Americans, in other words — the effect would not be as significant. The new law is primarily going to affect the lowest-income U.S. citizens and provide a safety net in the event of job loss or other circumstances. It is still unclear what effect, if any, the legislation would have on rising out-of-pocket medical costs and premiums.
Also in the bill:
- Affluent families would be required to pay additional taxes. Most Americans would be required to have health insurance and face federal penalties if they do not buy it.
- Beginning in 2014 many employers — those with 50 or more workers — could face federal fines for not providing insurance coverage.
- Six months after the legislation is enacted, many plans would be prohibited from placing lifetime limits on medical coverage, and they could not cancel the policies of people who fall ill. Children with pre-existing conditions could not be denied coverage.
- Within three months of the law taking effect, people who have been locked out of the insurance market because of a pre-existing condition would be eligible for subsidized coverage through a new high-risk insurance program.
- Major policy changes will take effect in 2014, as coverage is extended to a wider part of the population by Medicaid and state-run insurance exchanges.
It’s hard to determine exactly which stocks will be best-positioned to benefit from the new law, which is why we suggest using ETFs to get access to the whole sector. The changes as a result of this law will happen over a period of many years, not days or weeks. Ride the fortunes of the entire sector (or a sub-sector, if you wish) by choosing a well-diversified ETF.
- iShares Dow Jones U.S. Health Care Provider (IHF). This ETF is heavy on insurers, from UnitedHealth (NYSE: UNH), WellPoint (NYSE: WLP) and Aetna (NYSE: AET). One of the biggest questions about the reform is how it will affect insurers, which could leave the impact on this ETF up in the air.
- PowerShares Dynamic Pharmaceuticals (PJP): One segment of health care could win big: pharmaceuticals. Millions of new customers are going to flood the market in coming years, which means greater demand for drug treatment.
- Health Care Select Sector SPDR (XLV): XLV is another broad health care fund (and the largest health care-focused ETF). If you want to play the entire sector, from biotech firms to drug makers to equipment makers, this fund gives you a total, well-rounded play.
- iShares Dow Jones Medical Devices (IHI): More patients in the market will also mean more demand for medical equipment. Companies in this fund make things like surgical equipment, diagnostic equipment and X-ray products.
- Rydex S&P Equal Weight Health Care (RYH): This fund, which holds a variety of health care stocks in an equally weighted index, gives exposure to medical equipment and device makers, insurers and hospitals. Like pharmaceuticals and medical devices, hospitals may see an uptick in business as new patients come to market.
Read the disclaimer: Tom Lydon is a board member of Rydex|SGI.