Health Care ETFs See Hope

NEW YORK ( TheStreet) -- Even before President Obama took the oath of office, health care providers were pummeled by reform speculation.

As public support of health care measures has wavered, however, healthcare providers and the ETFs that track them may have a chance to rebound.

The iShares Dow Jones U.S. Healthcare Providers ETF ( IHF) (IHF), which counts United Health Group ( UNH), Aetna ( AET), Quest Diagnostics ( DGX) and Cigna ( CI) as top components, and the thinly traded PowerShares Dynamic Healthcare Services ( PTJ) have been two of the worst performing healthcare ETFs in the past 18 months.

During that period PTJ has lost close to 25% of its value, while IHF has lost more than 10%. While other health care ETFs like iShares Dow Jones U.S. Medical Devices ( IHI) and PowerShares Dynamic Healthcare ( PTH) have had similar returns to IHF, pharma and biotech ETFs have seen a wider range of results. iShares Dow Jones U.S. Pharmaceuticals ( IHE) and First Trust NYSE Biotech ( FBT) saw small gains.

This trend for providers could reverse, as voters turn their backs on the ambitious healthcare overhaul. Most recently, Democratic candidates in New Jersey and Virginia fell to their Republican challengers, a sign of voter dissatisfaction with the Obama administration's policies.

Recently, IHF and PTJ are showing signs of a rebound. For the three-month period ended Nov. 5, IHF has jumped 8.67% while PTJ climbed 5.37%.

The road to positive territory for these health care provider funds has been difficult. IHF was hammered in the autumn of 2008 as Barack Obama looked increasingly likely to win the presidency, because this sector is in the crosshairs of government reform.

Under a worst-case scenario, most of the companies in this ETF could be legislated out of existence under a universal health care plan. Thus, in the wake of Obama's election, shares tumbled and set a low that would not be surpassed until the following March.

Since Oct. 1, IHF is up 4% as the legislation lagged and pundits began to question whether any health care reform would pass Congress before the 2010 election,

While some investors may want to take this opportunity to bet against health care proposals with provider ETFs, it is still a very uncertain time for components of IHF and PTJ. Dramatic health reform, in one form or the other, including a potential public option, could weigh down shares of these funds in the future.

Whenever it appears the more radical reform proposals will gain acceptance, these shares wane on the potential public competition and the possibility that, at the extreme, they could cease to exist. When reform appears weakened or on the verge of failure, these shares have rallied back to normal. As the long-term chart shows, however, they are still lagging the overall health care sector.

Politics is difficult to predict and investors don't like uncertainty. However, at the extremes, stocks will become oversold or overbought. There is an increasing possibility that no health care reform bill will be passed this year or next year, however, in light of the election results earlier this week.

Investors who want to take a more speculative angle in the health care sector should consider IHF as a potential rebound play, though I would prefer to get in when political forces beat it down, rather than boost it. If reform continues to weaken though, there may be no more such opportunities. -- Written by Don Dion in Williamstown, Mass.

A special note from Don: To put it simply, I want to help you profit from ETFs. You don't have to be an expert trader -- there are potential profits for investors at every level. And I think there's no better way to jump into the world of ETFs than my brand new service, TheStreet ETF Action by Don Dion. Membership is limited, so click here to get in on the action!

At the time of publication, Dion did not have any positions in the equities mentioned.

Don Dion is president and founder of Dion Money Management, a fee-based investment advisory firm to affluent individuals, families and nonprofit organizations, where he is responsible for setting investment policy, creating custom portfolios and overseeing the performance of client accounts. Founded in 1996 and based in Williamstown, Mass., Dion Money Management manages assets for clients in 49 states and 11 countries. Dion is a licensed attorney in Massachusetts and Maine and has more than 25 years' experience working in the financial markets, having founded and run two publicly traded companies before establishing Dion Money Management.

Dion also is publisher of the Fidelity Independent Adviser family of newsletters, which provides to a broad range of investors his commentary on the financial markets, with a specific emphasis on mutual funds and exchange-traded funds. With more than 100,000 subscribers in the U.S. and 29 other countries, Fidelity Independent Adviser publishes six monthly newsletters and three weekly newsletters. Its flagship publication, Fidelity Independent Adviser, has been published monthly for 11 years and reaches 40,000 subscribers.

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