Market Overview

Overturn Obamacare: These ETFs Could Benefit (IBB, IHI, IHF)

As the battle over the Patient Protection and Affordable Care Act, also known as "Obamacare," rages on at the U.S. Supreme Court it pays to remember that this is a political issue. It also pays to remember that Washington, D.C. isn't Las Vegas, meaning what happens in D.C., unfortunately, doesn't always stay there.

At the moment, it appears likely that Obamacare, easily the most controversial and sweeping health care legislation this country has seen in generations, will be upheld and as Benzinga reported earlier, Goldman Sachs analyst Matthew Borsch predicted a "neutral-to-positive" reaction from healthcare stocks if the Court decides in favor of the government.

In the essence of being prepared, we looked for ETFs that might get a lift should Obamacare be overturned. To be sure, the exercise was somewhat tricky because over the past two years since Obamacare was signed into law most health care-related stocks and ETFs are up, many with impressive double-digit gains.

Here are a few ETFs that could rally should the Court rule against Uncle Sam.

iShares Dow Jones US Medical Devices Index Fund (NYSE: IHI) From March 26, 2010, just a few days after Obamacare was signed into law, through March 26, 2012, the iShares Dow Jones US Medical Devices Index Fund jumped almost 19%. That sounds impressive except for the part where that run lags the S&P 500 by a few points.

To this point, it can be argued that Obamacare hasn't hurt IHI, but the pain train may arrive next year should Obamacare be upheld. That's when a tax on medical device makers goes into effect. A study by the Battelle Technology Partnership Practice found the tax on medical device makers could lead to the loss of tens of thousands of jobs and billions of dollars of lost economic output.

Assuming Obamacare remains in place and the tax medical device makers isn't dealt with in a favorable manner, IHI could suffer.

iShares Nasdaq Biotechnology ETF (Nasdaq: IBB) This is another case where the ETF is higher since Obamacare was signed into law, but it's doubtful the legislation is the driving force behind IBB's stellar two-year run. If anything, a long life for Obamacare could jeopardize future strong performances for IBB and other biotech ETFs. Industry experts have opined that increased governmental burdens could stifle biotech innovation.

Worse yet, a study by Kaiser Health News shows share of venture dollars flowing to seed and early-stage investments in biotechnology and medical devices has plummeted since 2007. Obviously, President Obama wasn't in office in 2007 and 2008, but it might also be fair to say that the positive returns offered by biotech ETFs since 2010 have had little or nothing to do with health care legislation.

iShares Dow Jones US Healthcare Provider Index Fund (NYSE: IHF) The iShares Dow Jones US Healthcare Provider Index Fund has certainly been a winner under Obamacare as the ETF has surged 26% in the past two years. When one looks at the charts of some of IHF's top-10 holdings over the past two years, such as Unitedhealth (NYSE: UNH) and Humana (NYSE: HUM), it's hard to say the ETF and its constituents would be better off without Obamacare.

What IHF could benefit from is closure to the Obamacare controversy. As Bernstein Research noted WellPoint (NYSE: WLP), Coventry Health Care (NYSE: CVH) and Aetna (NYSE: AET) "should see a lift of the overhang in a bull case scenario if the mandate be determined unconstitutional while other onerous provisions that pose margin headwinds are also severed with the mandate," Barron's reported.

WellPoint and Aetna are IHF's third- and fifth-largest holdings, respectively, combining for almost 13% of the ETF's weight. Coventry accounts for another 2.3%.

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