Healthcare ETFs Await Supreme Court Ruling

Includes: IYH, VHT, XLV
by: Tom Lydon

Health care stocks and related exchange traded funds are holding their breath as the Affordable Care Act, health care reform or simply "Obamacare" is on the chopping block this week, waiting on the U.S. Supreme Court's ruling on whether or not the bill passes constitutional muster.

According to a previous S&P Capital IQ research note, Jeff Loo, head of Healthcare equity research for S&P Capital IQ, believes there will be one of three likely outcomes:

  • If the health care reform bill passes constitutional scrutiny, the health care sector would benefit from 32 million new insured customers. Specifically, health care facilities, managed health care centers, health car services and health care distributors would stand to profit.
  • If the Court finds that that the individual mandate and the rest of the health care reform is unconstitutional, this would have no real impact on the sector. Everything would be reset and go back to square one.
  • If the Court throws out the individual mandate but keeps the rest of the health care law, the concessions and costs associated with the potential 32 million new insured would remain but without the benefit of more paying customers. Sub-sectors that would take the brunt of the hit, including pharmaceuticals, health care facilities, managed health care and health care services.

The Supreme Court did not rule on the constitutionality of the health care law Monday, pushing the decision to Thursday morning.

Regardless of the legality of the health care bill, the U.S. is still facing an aging demographic, which will ultimately benefit the overall industry. According to the Centers for Medicare and Medicaid Services, the annual growth rate in health care spending is estimated to remain around 4% from now until 2014 before rising to to 6%, reports John Wasik for Reuters.

About 10,000 baby boomers are reaching 65 every day and the trend will continue until 2030 as the baby boomer generation make up one in every five Americans. Consequently, demand for chronic conditions, pharmaceuticals and acute care will rise, adding growth to pharmaceuticals and health care managed care provider sub-sectors.

For now, the reform outcome may affect health care ETFs as pharmaceuticals along with health care equipment and services sub-sectors make up large weightings in the funds.

  • Health Care Select Sector SPDR (NYSEARCA:XLV). Sector allocations include pharmaceuticals 50.7%, health care providers & services 17.7%, health care equipment & supplies 15.2%, biotechnology 12.1%, life sciences tools & services 3.5% and health care technology 0.8%.
  • Vanguard Health Care ETF (NYSEARCA:VHT). Sector allocations include biotechnology 15.2%, health care distributors 3.5%, health care equipment 15.0%, health care facilities 1.5%, health care services 5.3%, health care supplies 1.3%, health care technology 1.2%, life sciences tools & services 4.4%, managed health care 8.1% and pharmaceuticals 44.5%.
  • iShares Dow Jones US Healthcare (NYSEARCA:IYH). Sector allocations include pharmaceuticals & biotechnology 65.3% and health care equipment & services 34.5%.

Max Chen 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.