The Health Care Select Sector SPDR ETF (XLV), the largest exchange-traded fund (ETF) tracking health care stocks, is up nearly 6% year to date, highlighting strength in the S&P 500's second largest sector weight.
With the 2018 midterm elections just days away, health care stocks could be tested, particularly if both houses of Congress flip in significant fashion. Currently, market observers and political pundits appear comfortable betting that Democrats will gain control of the House of Representatives, with the Republicans maintaining control of the Senate.
Health care industry ETFs such as the SPDR S&P Health Care Services ETF (XHS) could come into focus if congressional upheaval ensues. XHS provides exposure to companies such as health care distributors, health care facilities, health care services and managed health care, according to the issuer.
In a recent research note, State Street Global Advisors (SSgA) highlighted XHS as a potential winner if Democrats gain control of both the House and the Senate. "If Republicans maintain majority control of the House and increase their Senate majority by at least one seat, they would likely have the votes to pass more substantial reform or repeal ACA in its entirety," said SSgA. "This poses a potential risk to hospitals and health care service providers, as uninsured individuals will still require treatment and emergency care – increasing the risk of non-payment for services rendered."
There are health care ETFs that could benefit from Republicans maintaining or expanding control of both houses of Congress, including medical device funds such as the SPDR S&P Health Care Equipment ETF (XHE). "Republicans could also repeal the medical device tax, a 2.3% excise tax set to come back into effect in 2020, and benefit health care equipment firms," said SSgA. XHE is up 17.73% year to date.
With the controversy surrounding drug prices ongoing, the SPDR S&P Pharmaceuticals ETF (XPH) is another health care fund that could be affected by midterm election results. XPH is down 1.38% year to date, making it a laggard among health care ETFs. "Drug pricing reform continues to be a hot topic for the president," said SSgA. "While unique in its potential to drum up bi-partisan support, to date Congress has focused only on pharmacy benefit managers (PBMs). A bill to ban pharmacy gag clauses currently sits on the president’s desk for signature."