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TheStreet Open House

Health Care ETFs With Big Obamacare Exposure

Stock quotes in this article: IHE, PJP, XPH, FXH, VHT, RYH

NEW YORK ( TheStreet Ratings) -- On Thursday, the U.S. Supreme Court will hand down its ruling on the constitutionality of the Affordable Care Act, otherwise known as Obamacare.

There are three basic scenarios that may play out. The law may be deemed fully constitutional, partially unconstitutional, or thrown out completely. In my opinion, two of these three scenarios may be good of healthcare exchange-traded funds in the long-run.

If the Supreme Court puts their political leanings aside, follows the actual words of the U.S. Constitution's commerce clause, and the applicable Citizens United precedent, where corporate people have been mandated to make health safety purchases since the 70's, then Obamacare would be declared to be completely constitutional. This would be good for the health care stocks as uncertainty would be massively reduced and millions of new paying customers would be added to the health care system.

More insured people getting prescriptions for more drugs would benefit the "B" rated iShares DJ US Pharmaceuticals (IHE), "B" rated PowerShares Dynamic Pharmaceuticals (PJP), and "B-" rated SPDR S&P Pharmaceuticals ETF (XPH).

The certainty of more customers would be good for the health equipment and service providers too. The "Buy" ranked health sector ETFs with exposure to these industry groups include the "B" rated First Trust Health Care AlphaDEX (FXH), "B-" rated Vanguard HealthCare Index ETF (VHT), and "B-" rated Guggenheim S&P 500 Eq Wght HC ETF (RYH).

To bet on this outcome, it would be best to have positions in these funds prior to the ruling.

On the other hand, if you believe that the Supreme Court will strike down the mandate but leave in-place the remaining facets of the Affordable Care Act then the play here would be to wait for the market's over-reaction to the downside before buying these good funds on the cheap. Corporations and their employees will be the big losers here as insurance costs skyrocket to maintain insurance company profits.

While it would be unlikely that the entire law be struck down, this would be the worst possible outcome for health care related stocks. Not only did these companies spend millions of dollars buying politicians, but they also have spent a bunch of money preparing to implement the law.

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