How Healthcare ETFs Shaped Up Ahead Of Election Day

It is the second-largest sector weight in the S&P 500 and also the worst-performing corner of the benchmark U.S. equity gauge this year, but with Election Day finally here, it is possible the worst is behind the healthcare space.

The Health Care SPDR (ETF) XLV, the largest healthcare exchange-traded fund, and rival diversified healthcare ETFs have been plagued by election year rhetoric aimed at high drug prices. Much of that rhetoric has come courtesy of Democratic nominee Hillary Clinton.

What Will Happen After Clinton/Trump Takes Office?

However, pundits and market observers widely posit that stocks will rise if Clinton wins, indicating they have faith the S&P 500 will climb without much assistance from its second-largest sector weight.

Either that or they believe the worst is behind the healthcare sector. That assumption would also include biotech, usually a significant portion of ETFs like XLV, rebounding on news of a Clinton victory. Yet, Clinton has been blamed as the primary reason behind why the iShares NASDAQ Biotechnology Index (ETF) IBB has tumbled this year.

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.

“If Trump wins and both bodies of Congress remain Republican, single name healthcare/biotech stocks have the most upside. Even if Clinton wins, there is an upside for the sector if Republicans keep the Senate,” said Rareview Macro founder Neil Azous in a note out Monday.

Q4 Flows' Dichotomy

There is a dichotomy in fourth-quarter flows for IBB and XLV. For example, investors have yanked $506 million from XLV while allocating nearly $252 million to IBB, the largest biotech ETF by assets. Narrowing the time frame down to the past two weeks, shows an even greater flows chasm between the two healthcare ETFs. XLV has shed nearly $551 million over that period, but IBB has seen inflows of about $331 million.

As has been duly noted throughout the course of this presidential election, rhetoric from both parties concerning high pharmaceuticals prices has been a drag on the healthcare sector and for biotechnology stocks in particular.

Unfortunately, healthcare leaders have recently retreated. For example, medical device makers have been the strongest part of the healthcare sector this year, but have recently tumbled. XLV allocates over 23 percent of its weight to healthcare equipment makers and life sciences tools manufacturers.