Healthcare ETFs Hitting Resistance

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Includes: IHF, IYH, VHT, XLV
by: Tom Lydon

Healthcare stocks and exchange traded funds are facing several headwinds for the rest of 2012. Factors such as lower profitability, European austerity measures, the 2012 U.S. Presidential election and the U.S. Supreme Court's recent decision to uphold the healthcare reform law will all affect the sector. S&P Capital IQ said in a research note.

We believe the Court's ruling removed some of short-term uncertainty that has weighed on the Health Care sector since it agreed to hear the case in late 2011.

Jeffrey Loo, S&P Capital analyst, wrote in a note:

However, the Court's ruling does not make the law any less contentious, and we expect continued ongoing battles, and potentially more uncertainty after this year's elections. Congressional Republicans, presumed Presidential candidate Mitt Romney, and others opposed to the law have stated plans to continue fighting it.

Despite the impact of the upcoming presidential election, S&P Capital IQ rated three major healthcare ETFs as "Overweight". The Healthcare Select Sector SPDR (NYSEARCA:XLV), iShares Dow Jones US Healthcare Index (NYSEARCA:IYH) and the Vanguard Healthcare ETF (NYSEARCA:VHT) are all heavily tilted toward the pharmaceutical industry.

The patent cliff that is in full swing currently has not kept investors from carrying the aforementioned funds. XLV is up 5.3%, and IYH and VHT are up about 6% each this year.

S&P Capital said in a note:

The Pharmaceuticals sub-industry, which represents the largest weighting within the Health Care sector at about 50%, gained 8.8% year-to-date through August 10, with the majority of the gain within the past 13 weeks where it gained 6.5%, vs. a 3.5% rise in the S&P 1500.

Healthcare valuations remain attractive, at about 20% below historical levels. The iShares Dow Jones US Healthcare Providers Index Fund (NYSEARCA:IHF) is up about 11% year-to-date, and has gained due to the Healthcare Reform Law, which should continue to increase the number of U.S. citizens that carry health insurance.

Healthcare Select Sector SPDR

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Tisha Guerrero contributed to this article.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.