Healthcare ETFs Face Election Year Blues

Thanks to a recent rally, the Health Care Select SPDR XLV and comparable healthcare exchange traded funds have nudged higher on a year-to-date basis. Compared to how it looked a few weeks ago, XLV's 0.1 percent year-to-date gains looks decent.

Relative to how XLV performed over the past few years, the ETF is still in a funk. A combination of factors are weighing on the healthcare sector, the third-largest sector weight in the S&P 500 this year. Among those factors are slumping biotechnology stocks. For example, the iShares Nasdaq Biotechnology ETF IBB, the largest biotechnology ETF, even with the help of a recent surge is off 14.7 percent this year.

A significant part of the biotechnology industry's struggles, and thereby the broader healthcare sector's, since tumbling from last year's highs can be traced to political posturing. With 2016 being a presidential election year, the political commentary aimed the healthcare sector could become more amplified, dragging ETFs such as IBB, XLV and friends into an unwanted spotlight.

Some analysts point to the Democrats and their ability to possibly, emphasis on “possibly,” gain control of the House of Representatives as something healthcare investors should keep an eye on.

“What we're really focused on is the risk that the Democrats have the White House and take control of the House and Senate. If that happens, we could start to see some of these bills that have been floating around and haven't been able to get bipartisan support actually get passed. We took a look at what those bills would be, and for the most likely ones, we tried to quantify the impact on the companies we cover,” said Morningstar analysts in a recent research piece.

Some market observers believe healthcare's recent slide is a buying opportunity. Add to that, the political consternation that is widely attributed as one of the primary drags on the sector is seen as overdone.

XLV, the largest healthcare ETF by assets, allocates about 23.1 percent of its weight to biotech stocks. That is nearly 800 basis points more than the ETF's weight to medical device makers, some of this year's best-performing members of the healthcare sector.

To quantify just how much of a drain biotech stocks have been on XLV and comparable healthcare ETFs this year, consider this: Of the 19 members of the Dow Jones Industrial Average that are higher on the year, four are also members of XLV and that quartet combines for about 30 percent of the ETF's weight.

Predictably, a big issue will be the government's role in drug pricing.

The government is “very aware that drug prices have been increasing quite a bit. Last year, pricing really accelerated. A lot of that was because of hepatitis C and the launch of an expensive new therapy. Drug companies have been steadily increasing prices on drugs over the years, even ones that have been on the market for five or 10 years already. In the future, the government is going to have to walk this line of encouraging innovation, but trying to make sure that the increases in spending that they're seeing on drugs are going to supporting the right therapies,” notes Morningstar.