The iShares U.S. Healthcare Providers ETF (NYSEARCA:IHF) has betrayed me and, more importantly, other investors this year. And that “betrayal” has continued in the third quarter.
For now, that speculation has ebbed because prevailing wisdom among analysts and investors is that even if President Trump is defeated by a Democrat in 2020, Medicare For All would prove to be too risky of a gambit for the next president.
Additionally, former Vice President Joe Biden remains one of the leading contenders for the 2020 Democratic nomination and he doesn’t favor Medicare For All. In fact, his campaign is doing everything it can to persuade Democratic primary voters that Medicare For All is a bad idea and polling data suggest there’s something to that strategy.
A recent poll “commissioned by the centrist Democratic think tank Third Way, found that primary voters start off favoring the government-run health care system by a margin of 70% to 21%, but can be persuaded to oppose it,” reports Bloomberg. “The study showed that Democrats are most swayed by the arguments that the program would impose a heavy cost on taxpayers and threaten Medicare for senior citizens.”
By no means am I saying that the Medicare For All issue is dead and that it can’t come back to haunt IHF and stocks like UnitedHealth. That’s simply the lay of the land with the healthcare sector: it’s a politically sensitive group. However, IHF’s near-term Medicare For All woes are likely minimal.
Still, the healthcare provider ETF has been a third-quarter dud, as has the broader sector. As of Sept. 23, IHF and the broader Health Care Select Sector SPDR (NYSEARCA:XLV) sported third-quarter losses of 1.3%, while the S&P 500 was up 1.3%.
With the benefit of hindsight, the July through September period should have been an ideal time in which to own IHF. Trade tensions ran high for much of the quarter, but outside of real estate and utilities, healthcare is one of the most domestically focused sectors.
Simply put, companies such as UnitedHealth and Anthem, which combine for almost 37% of IHF’s roster, aren’t doing much business in China. Recently, managed care providers have come under pressure due to rising hospital costs.
“A July hospital survey from JPMorgan last week has heightened concerns about insurers’ spending on patients’ medical claims in the third quarter. Anthem Inc., UnitedHealth Group Inc. and Centene Corp. were among the companies that flagged rising costs in the past quarter,” according to Bloomberg.
Is Betting on the IHF ETF Just Bottom Fishing Now?
An endorsement of IHF here and now is a risky proposition due to the aforementioned factors. Sure, the ETF is 18.34% below its 52-week, implying it shouldn’t decline much more, but in reality, a retest of the May lows would mean a 10%-plus haircut.
Much of IHF’s fortunes, near- and long-term, will be determined by UnitedHealth. That stock’s prospects into year end are murky, which will penalize IHF in the best ETFs competition, but it bodes well for patient investors.
“Cost advantages and network effects generated by the company’s size and scope underpin UnitedHealth’s wide moat and we think support its ability to serve clients at a lower overall cost than that of rivals,” according to a Morningstar note on UNH out earlier this month. “The result is enrollment growth and returns on capital that are nearly unachievable by competing firms.”
As of this writing, Todd Shriber did not hold a position in any of the aforementioned securities.