Medical Device ETFs Flash Bearish Technicals, Fundamentals Post-Obama Win

By  NOV 09, 2012 2:57 PM

There is no denying that stocks and ETFs have a tendency to overreact following elections.


Some market historians would be inclined to argue that price action in stocks is not a direct result of whomever resides in the White House. That may be true. Maybe it is not, but there is no getting around the fact that some sectors can be positively and negatively affected by electoral politics. There is also no denying that stocks and ETFs have a tendency to overreact following elections.

However, that does not change the fact that nearly 500 ETFs and ETNs, or more than a third of third of the entire US-listed exchange products universe, entered Friday below the critical 200-day moving average. Fund managers and technicians often view securities that reside below the 200-day line as far removed from a bull market and vulnerable to further declines.

Two of those ETFs are the iShares Dow Jones US Medical Devices Index Fund (NYSEARCA:IHI) and its more equal-weight rival, the SPDR S&P Health Care Equipment ETF (NYSEARCA:XHE). The funds are rallying today as the broader market aims to cut some of its Wednesday/Thursday losses.

Well, sort of rallying. IHI, which has $274.3 million in assets under management, is up 0.9 percent. Sounds good until one discovers that with less than fours to go in the session, IHI's volume is barely over 1,800 shares. The ETF's average daily volume for the past three months is over 40,000. XHE is up by roughly the same amount of volume of just 350 shares. That ETF's average turnover for the past 90 days is 1,950 shares.

The reason why investors should not be lured in by Friday's bounce in IHI and XHE is simple: The underlying holdings of these could be in for some tough times now that President Obama has been re-elected. As we reported in March one of the dirty secrets of Obamacare is a tax on medical device makers.

A study by the non-partisan Battelle Technology Partnership Practice highlights the notion this is not any old tax. It is one that is expected to cost tens of thousands of jobs and billions of dollars in lost US GDP growth at a time when the US economy can afford neither. And as we reported earlier this week, the road investors face with ETFs such as IHI and XHE is made even more difficult for a couple of reasons. For starters, most investors surmised that health care stocks would benefit from an Obama re-election. That might ultimately be the case for ETFs such as the Health Care Select Sector SPDR (NYSEARCA:XLV) and the iShares Dow Jones US Healthcare Providers Index Fund (NYSEARCA:IHF). That will not be the case for IHI and XHE.

Second, and perhaps by virtue of assumption that an Obama win was supposed to be good for the health care sector at large, mainstream coverage of the medical device tax and the problems it can create for investors has been scant at best.

That is odd when considering the average market cap of the stocks in the Dow Jones US Medical Devices Index, the index tracked by IHI, was almost $14.5 billion at the end of September, according to iShares data.

Medtronic (NYSE:MDT), IHI's top holding with a weight of almost 11 percent, has a market value north of $42 billion. Intuitive Surgical (NASDAQ:ISRG), one of the great growth stocks of the past decade, has a market cap of just over $21 billion. In other words, IHI and XHE are not home to small, unknown companies.

Medtronic has said the tax could hurt its future investments. Stryker (NYSE:SYK) and Zimmer Holdings (NYSE:ZMH) have already announced layoffs related to the tax. The two are IHI's fifth- and sixth-largest holdings, combing for 11 percent of the ETF's weight.

In September 2011, Advanced Medical Technology Association forecast the loss of 43,000 jobs related to the Obamacare tax on medical device makers. Even if the number works out to just half that, 21,500 lost jobs is 21,500 too many.

It is unlikely IHI and XHE's constituents will benefit because analysts will realize any increase in profitability, saying that scenario even arrives, will have come by way of cost cuts, not top-line growth. In other words, Friday's bullishness in these two ETFs is a sucker's rally.

Editor's Note: This content was originally published on by The ETF Professor.

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