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


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

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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by Jeff Uscher

Twitter: @Benzinga

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No positions in stocks mentioned.

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