It is a big "if" regardless of sector or asset class, the "if"
being possible help from Capitol Hill, but it is possible that a
group of U.S. senators could boost the fortunes of medical device
stocks and the
that track those equities.
As has been
previously noted, medical device ETFs
, such as the iShares Dow Jones U.S. Medical Devices Index Fund
) and the Health Care Equipment ETF (NYSE:
), could be vulnerable to selling pressure in 2013.
That downside would not be the result of the fiscal cliff.
Rather, IHI, XHE and their components are vulnerable due to what
is a nasty aspect of the Affordable Care Act, or Obamacare.
Within Obamacare there is a punitive tax on medical device
A study by the non-partisan Battelle Technology Partnership
Practice highlights the notion this is not any old tax. It is one
that is expected to cost tens of thousands of jobs and
billions of dollars of lost U.S. GDP
As was the case with the broader market, IHI and XHE stumbled
the days immediately following President Obama's reelection. And
has been the case with broader market, the two ETFs have rallied
in recent weeks. In fact, in the past month, IHI is up 4.4
percent and XHE is higher by 3.8 percent. Arguably, those gains
merely give eager shorts a higher price from which to punish
these ETFs come the first trading day of 2013 when the tax on
medical device makers goes into effect.
That is unless a group of 17 Democratic senators have their
way and get the medical device tax repealed. As the
Washington Post notes
, this situation could have been avoided because the members of
this group of 17 that were in office when Obamacare was voted on
voted in favor of the legislation, which included the medical
device manufacturer tax.
As the senators
point out in a letter
to Senate Majority Leader Harry Reid (D-NV), the medical
technology industry directly employs 400,000 people in the U.S.
and it is one of the few U.S. industries that enjoys a net trade
surplus. Smart investors (and constituents) will no doubt ask why
the senators that signed this letter, 15 of which were in office
when Obamacare was passed, voted for the bill. Those same
investors and constituents may also be wondering why these
policymakers have suddenly changed their respective tunes.
One need only examine the rosters of IHI, XHE and the home
states of the senator's that signed the letter to Reid. For the
purposes of this exercise, IHI will be the ETF of choice because
it has almost $282 million in assets under management compared to
XHE's modest total of $20.17 million.
IHI's five largest holdings are Medtronic (NYSE:
), Covidien (NYSE:
), Thermo Fisher Scientific (NYSE:
), Intuitive Surgical (NASDAQ:
) and Stryker (NYSE:
Excluding Covidien for a moment because it is based in
Ireland, it is worth noting Medtronic is based in Minnesota,
Thermo Fisher is based in Massachusetts, Intuitive Surgical is
headquartered in California and Stryker makes its home in
Covidien currently has
job openings in a number of states
, including Indiana, Michigan, Minnesota, Nebraska, New Hampshire
and New York.
Not surprisingly, the roster of senators to sign the letter to
Reid includes both a sitting senator and a senator-elect from
Massachusetts, a senator-elect from Indiana, both Minnesota
senators, both New York senators, and one each from Michigan,
Nebraska and New Hampshire.
IHI's other top-10 holdings are Indiana-based Zimmer Holdings
), Minnesota-based St. Jude Medical (NYSE:
), California's Varian Medical (NYSE:
) and Boston Scientific (NYSE:
) and Waters (NYSE:
), both of which call Massachusetts home.
Said differently, of the senator's representing states IHI's
top-10 holdings are either based or do significant business in,
Barbara Boxer and Dianne Feinstein, two California Democrats,
stand out for not having signed the letter to Reid.
With less than three weeks before the end of the year and
politicians from both parties immersed in fiscal cliff-solving
activities, it appears unlikely the medical device tax will be
repealed before January 1, 2013. That could mean a tough start to
the new year for IHI and XHE. Still, investors should keep an eye
on these ETFs throughout 2013 and be flexible enough to consider
long positions as well. After all, five of the senators that
signed the Reid letter are up for reelection in 2014.
For more on ETFs, click
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advice. All rights reserved.