Medical Devices ETF Could Get Election Lift

The election of Republican Scott Brown to a U.S. Senate seat in Massachusetts Tuesday could give a short-term lift to the big-name medical device manufacturers at the top of the iShares Dow Jones US Medical Devices ETF ( IHI) roster.

Top medical device firms like Medtronic ( MDT), Thermo Fisher Scientific ( TMO) and Stryker ( SYK) have been under pressure during this young presidency as a major overhaul of the health care industry took shape.

As health care reform, once hallmarked by a government-backed public option, was increasingly slowed by the legislative process and mercurial public opinion, health care stocks rebounded.

Subsector ETF offer investors the unique ability to compare and track narrow slices of the market. While many ETFs currently compete in the health care space, a quick analysis of the iShares line-up offers a revealing look into this sector's trends.

The iShares Dow Jones US Medical Devices ETF ( IHI), iShares Dow Jones US Pharmaceuticals ETF ( IHE) and iShares Dow Jones US Healthcare Providers ETF ( IHF) all fell significantly in 2008 as President Obama's election loomed large and rebounded in 2009 as a massive health care overhaul seemed increasingly improbable.

In 2008, IHI, IHE and IHF fell 36.79%, 14.91% and 43.46%, respectively. As a "public option" became less of a threat to health care providers in 2009, IHF rebounded more than 35%. IHI and IHE also improved 38.49% and 30.06% in 2009, respectively.

Year to date, the controversy surrounding health care reform appears to have strengthened the stocks of top industry names. IHI, IHE and IHF are up 3.49%, 2.53% and 5.76% year to date respectively.

While once-embattled health care providers like UnitedHealth Group ( UNH) and WellPoint ( WLP) are leading the pack, the companies that comprise IHI's portfolio could also get a jolt from the latest slow-down in health care reform.

Although investors have largely dismissed the emergence of a government-run insurance competitor, the outlook for medical device makers has been uncertain. Companies like Medtronic, the top component in IHI's portfolio, depend on Medicare reimbursements. Investors have been trying to figure out how much rate-cutting is priced into the medical device-maker group.

The political change in Massachusetts reflects a public reluctance to health care proposals. The more that the rate-cutting measures in the health care bill are challenged, the more that IHI stands to gain.

At the time of publication, Dion was long IHI and IHE.

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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