It Could Be An Interesting Ride For Healthcare ETFs

Election Day 2016 is less than 80 days away. Those remaining bullish on healthcare stocks and exchange-traded funds probably wish election day would come and go sooner than that, because the sector remains fertile ground for election year rhetoric.

XLV Performance

The Health Care SPDR (ETF) XLV is up 4.2 percent year-to-date, a decent showing all things considered, but mediocre compared to other sector ETFs and XLV's own recent annual performances. Biotechnology ETFs have, until recently been laggards, too. For example, the SPDR S&P Biotech (ETF) XBI is down 9.4 percent year-to-date.

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Biotech's laggard status is plaguing diversified healthcare ETFs such as XLV, because those funds often allocate 20 percent or more of their weight to biotech stocks. In most cases, only pharmaceuticals stocks, another group that has not been immune to election year chatter, outweigh biotech in standard healthcare ETFs.

Policy Divergences And Biotech/Healthcare ETFs

“The sector that could potentially be affected the most by policy divergences between Republican presidential nominee Donald Trump and Democratic presidential nominee Hillary Clinton is health care—namely, pharmaceuticals and biotechnology,” according to State Street Global Advisors (SSgA).

Healthcare ETFs have recently shown signs of shaking off the election year jitters. Over the past 90 days, XLV is higher by 7.4 percent while XBI is up 16 percent. While it is not always clear which candidate the broader market prefers, data make it clear the healthcare sector, if it could display emotion, would express concern about Clinton.

Data confirm as much. Since the start of this year, XLV's underlying index, the S&P Health Care Select Sector Index, has had an inverse relationship to Clinton's polling numbers. Although most polls still show her ahead of Republican rival Trump, Clinton's numbers have weakened enough over the past six or seven weeks to lend a hand in XLV's rebound.

Contrarians, Pay Attention

“Swings in health care sector sentiment between now and the November presidential election could create opportunities for contrarian investors to watch the polls and give their portfolio a small tilt toward or against the health care sector—potentially creating an outsized boost in overall portfolio returns,” added SSgA.

Investors, to this point, are proving reluctant to make pre-election contrarian bets on healthcare ETFs. Since the start of the current quarter, XLV has added $11.3 million in new assets while XBI, the third-largest biotech ETF, has lost $85.6 million in assets.

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