In what looks to be the biggest Supreme Court decision since
Bush v. Gore
, the highest court in the land will give its opinion on whether or
not the Affordable Care Act (ACA), popularly known as 'Obamacare',
is constitutional. The decision looks to come during the final day
of the Supreme Court's session before breaking for the summer and
it will undoubtedly be a landmark result either way.
A great deal of the debate is centered on the 'individual mandate'
or a stipulation in the bill which required all U.S. citizens and
legal residents to
obtain government-approved health insurance
. If people do not get this insurance, they will have to pay a fine
as a penalty for not doing so starting in 2014.
Some on the right believe that this is unconstitutional as the
government cannot force you to engage in a contact with a private
company. They also feel that by giving the government this power,
there is no telling what can be mandated next in any industry under
the guise of doing it for the public good (read
Invest Like The One Percent with These Three
ETFs
).
Meanwhile, those on the left believe that the individual mandate is
nothing more than a tax, no different than social security or
Medicare, each of which we are forced to pay into already as a form
of insurance. Beyond that, the left's arguments can also consist of
a focus on the Commerce Clause, which gives Congress the ability to
regulate economic activity
connected
to interstate commerce, presumably such as health care.
This issue is at the crux of the health care debate and it appears
to be the main focus of the constitutionality in the Obamacare law.
With that being said, it should be noted that there are
realistically three outcomes for Thursday; the entire bill is
constitutional, the mandate is unconstitutional but the rest of the
bill is acceptable, or that the mandate is unconstitutional and
'unseverable' from the rest of the bill, rendering the entire ACA
bill unconstitutional.
Likely Outcomes
I think it is fair to say that both sides make some excellent
points regarding the debate and that this issue really could go one
way or another. However, while the decision may still be uncertain,
the markets and many participants in the process are starting to
believe that the court will rule against the mandate but leave the
rest of ACA intact (see
Could The Small Cap Health Care ETF Be A Great
Pick?
).
In fact, Intrade,
an online prediction market
, currently has the chances of the individual mandate being ruled
unconstitutional (before the end of the year) at roughly a
three-out-of-four rate. Additionally,
a poll of legal experts
now expects the Supreme Court to find the individual mandate
unconstitutional, although not by a wide margin.
While it is also possible that the Court can postpone the decision
to later on in the year, many view this as unlikely. Probably also
out of the cards is the Court postponing a decision due to the
'Anti-Injunction Act' suggesting that the ruling will be coming
sooner rather than later for Obama's hallmark piece of domestic
legislation.
Stock Market Impact
Clearly no matter what happens, health care stocks and the sector
at large will be in focus. Many companies have literally billions
to lose on the decision and since it is still so uncertain what
actually will happen, we could see a volatile period for the
industry in the near term (read
11 Great Dividend ETFs
).
While looking at the decision on a stock-by-stock basis is
certainly one way to go, many people believe that the results of
the decision are likely to impact securities from an industry
perspective instead. For investors subscribing to this belief,
there are a wide number of ETFs that can provide exposure to the
health care sector, breaking down the space into a number of niche
industries.
In total, there are 20 health care ETFs on the market today that
have a U.S. focus. While there are a number of broad health care
ETFs (such as
XLV
,
VHT
, or
IYH
), there are also a variety that have a more targeted focus
including several that target the biotech (
XBI
,
FBT
, or
BBH
), medical device (
IHI
), healthcare provider (
IHF
), and pharmaceutical segments (
PJP
,
PPH
, or
XPH
).
In the chart below, we have highlighted what we believe are the
likely outcomes for each of the major categories of health care
ETFs after the long-awaited decision is finally released:
In summary, if the individual mandate is thrown out, it looks
likely to spell bad news for the entire sector. That is because the
mandate would add a ton of cheap-to-ensure people to the rolls of
HMOs-- like with United Healthcare (
UNH
)-- while it would drive up demand for devices, services and drugs,
helping pretty much the entire industry.
If the bill is upheld in its entirety, a much more mixed outlook
could be the result. With that being said, it will definitely be a
big win for pharma (and companies like Johnson & Johnson (
JNJ
) or Pfizer (
PFE
), and to an extent, healthcare providers and service companies as
well. However, medical device makers look likely to be hurt by the
ruling due to new taxes, while biotech could suffer from a similar
issue as well (see
Medical Device ETFs: A Better Way To Play Health
Care?
).
Lastly, if the entire bill is deemed unconstitutional, which at
this point seems unlikely, it also could produce a mixed result.
Broad health care is likely to stay about even, but investors could
see a modest uptick for device makers and biotech, while pharma and
the HMO market could be losers due to lower demand for their
services.
Beyond these unleveraged choices, investors also have a few ways to
play the decision with leverage. In total, there are four ETFs in
this segment of the fund world, offering investors exposure to both
bull and bear 2x strategies as well as both directions in 3x form
as well:
ProShares Ultra Health Care ETF (
RXL
)/ ProShares Ultra Short Health Care ETF (
RXD
)- These two products track, respectively, the 2x and -2x versions
of the Dow Jones Health Care Index. This benchmark is heavily
weighted towards big pharma, but it is still relatively spread out
among its 122 securities.
Direxion Daily Healthcare Bull 3x Shares (
CURE
)/Direxion Daily Healthcare Bear 3x Shares (
SICK
)- These two products track, respectively, the 3x and -3x versions
of the Health Care Select Sector Index. Much like their ProShares
counterparts, these funds have a focus on big pharma, although they
have a heavier level of concentration in their top securities, only
holding 52 stocks in total (read
Understanding Leveraged ETFs
).
While the volumes on these products aren't exactly the most robust
in the ETF world-- suggesting relatively wide bid ask spreads--
they could see higher levels of activity leading up to and
immediately following the in-focus decision. Given this, these
products could be the way to play the situation, although investors
should be prepared for a great deal of volatility and uncertainty
no matter what health care stocks or ETFs they hold immediately
following the pivotal Supreme Court ruling.
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@Eric
Dutram
Author is long PBE, PFE.
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