The health care sector has never seen anything like this and neither has the American public.
After months of political wrangling, the Affordable Health Care for America Act was signed into law by the President.
The act will extend health insurance coverage to roughly 32 million Americans without it. The new law will also require most Americans to purchase health insurance coverage and will provide subsidies for private health care to low- and middle-income families.
In the meantime, as the legislative details on the measure becoming clearer, investors are asking: What does it mean for the health care sector? Is it doomed?
The two primary groups impacted by the new health care bill are health insurers and the broader health care arena, which encompasses hospitals, medical device makers and pharmaceutical companies.
Let’s analyze the key healthcare ETFs. (Performance figures are through the March 24 market close.)
Health Care Sector SPDR (XLV)
This ETF follows health care stocks within the S&P 500. This particular industry sector covers stocks of companies involved in health care equipment and supplies, health care providers and services, biotechnology and pharmaceuticals makers. The health care industry accounts for 12 percent of the S&P 500′s overall sector weighting, making it the third largest sector within the index just behind financial stocks (XLF) and technology (XLK). With $2.7 billion in assets, XLV is the largest health care ETF.
This year, XLV has climbed 3.44 percent compared to a 4.68 percent gain in S&P 500 (SPY). Johnson & Johnson, Pfizer and Abbott Laboratories are among the fund’s largest holdings. XLV’s annual expense ratio is currently 0.21 percent.
iShares Dow Jones U.S. Healthcare Sector Index Fund (IYH)
The Dow Jones index that this particular ETF follows provides market exposure to 131 health care stocks. Biotech and pharmaceutical stocks dominate IYH’s sector exposure with a weighting of some 61 percent. Health care services and equipment companies represent around 35 percent of IYH’s weighting.
Companies within the index are selected passively and weighted according to their market capitalization or size. The median market size of healthcare stocks within IYH is around $2 billion.
IYH has risen 3.96 percent this year, and the fund’s annual expense ratio is 0.48 percent.
Vanguard Healthcare ETF
The Vanguard ETF follows the MSCI US Investable Market Health Care 25/50 Index. This particular healthcare ETF is the most diversified among similar offerings and owns around 309 stocks. The median market size of health care stocks within VHT is around $39.5 billion.
Vanguard recently revamped its sector ETFs by constructing MSCI 25/50 sector indexes. The new indexing methodology helps the funds to comply with IRS diversification rules.
This year VHT, as of late March, was ahead by 5.24 percent. The fund’s annual expense ratio is 0.25 percent.