Health Care Plan Poses Risks for ETFs

As the Senate took the U.S. one step closer to national health care on Sunday, some ETFs in the sector could face a second round of Obama-inspired losses. As billions of new taxes are levied on insurers, large pharmaceutical companies and medical device makers, health care subsector exchange-traded funds will face different challenges.

The increasingly likely health care law could smother recent gains seen by medical devices and pharmaceutical ETFs, like the iShares Dow Jones U.S. Medical Devices (IHI) and iShares Dow Jones U.S. Pharmaceuticals (IHE).

ETFs that track health care providers, like the iShares Dow Jones U.S. Healthcare Providers (IHF), and biotech companies, like the iShares Nasdaq Biotechnology ETF (IBB), may already have seen the worst of their losses.

The initial hit to health care ETFs came in the wake of President Obama's election. As plans for sweeping reform materialized, ETFs across health care's subsectors were impacted. In 2008, IHI and IHE dropped 36.79% and 14.91%, respectively.

IHF, which tracks health care providers like UnitedHealth Group (UNH) and WellPoint (WLP), fell 43.46%, while IBB fell 12.28%.

In 2009, as health care reform appeared to be sinking while the market recovered, health care ETFs reversed course. Year to date, IHI and IHE are up 35.74% and 27.89%, respectively.

IHF and IBB also have been on the upswing in 2009. Year to date, IHF is up 34.85% while IBB has increased 11.68%.

While the broad spectrum of narrowly focused health care ETFs have, thus far, moved as a group, the transformation and passage of the health care reform bill could send these funds in different directions.

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