Another Election Year View On Healthcare ETFs

Just two months away from Election Day, it is accurate and fair to say this presidential election year — as have previous ones — has been unkind to the healthcare sector.

Election Year Blues

The third-largest sector weight in the S&P 500 is lagging the benchmark U.S. equity index by a wide margin. For example, the IYH is up just 1.6 percent year-to-date, less than 20 percent of the 8.5 percent returned this year by the S&P 500.

Viral Volatility?

Paragon

Over the past 90 days, traditional cap-weighted healthcare ETFs such as IYH have steadied a bit, returning around 1 percent. However, that still lags the S&P 500 by a considerable margin and underscores a point recently that healthcare stocks are inversely correlated to Democratic nominee Hillary Clinton's poll numbers.

Related Link: Infrastructure Intelligence With This ETF

Put simply, if polls emerge showing Clinton extending her lead over Republican rival Donald Trump, it is likely healthcare stocks and ETFs will fall on that news.

This creates a good news/bad news situation for investors mulling new stakes in the likes of IYH.

“Although volatility is likely to persist across the broad market, specific sectors may be particularly vulnerable, or conversely, offer some opportunity. Among those to be cautious on is health care,” said BlackRock in a recent note. “The sector has historically underperformed in election years (source: Bloomberg), due in large part to concerns over pricing pressure on the biotech and pharmaceuticals subsectors. The latest headlines over EpiPen pricing have renewed this focus and brought with it increased volatility.”

As has been widely documented, election year political yammering has negatively affected the biotechnology stocks. In turn, that has plagued ETFs such as IYH because — although these are diversified healthcare ETFs — they feature significant biotech weights. For its part, IYH allocates over 23 percent of its weight to biotech stocks.

Consider this: Four of the Dow stocks that are up at least 10 percent this year are Johnson & Johnson JNJ, Merck & Co., Inc. MRK, Pfizer Inc. PFE and UnitedHealth Group Inc UNH. Those stocks combine for nearly 29 percent of IYH's lineup, but the ETF is not even up 2 percent this year because of biotech's politically-induced drag on the broader healthcare sector.

“Over the short term, we don’t believe that the election and a new president will have a big impact on health care stocks’ fundamentals. Given the two candidates’ opposing views on health care, however, there could well be longer-term implications on policy changes. But remember that implementing any real, significant changes to the health care system will need to pass through Congress and will likely take years, not months,” added BlackRock.

Full ratings data available on Benzinga Pro.

Disclosure: Todd Shriber owns shares of JNJ.