For Healthcare, a Dark Cloud Should Lift

 | Mar 27, 2012 | 11:00 AM EDT  | Comments
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Stock quotes in this article:

IHF

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XHS

Investors on Wall Street will be keeping a close eye on Washington this week, with the Supreme Court set to hear three days of arguments on the controversial healthcare legislation that has been the topic of intense debate for the last two years. As is often the case, the decisions made in our nation's capital could have a significant impact on stock markets in coming sessions -- and, in this case, that will especially apply to healthcare stocks that could see their operations affected directly by the outcome.

A decision in the case won't come for several months. However, many analysts expect that, by the end of the arguments this week, there should be a pretty good indication of which way the justices are leaning. That, in turn, could give a much clearer picture of what the future holds for various segments of the healthcare industry.

If the Supreme Court upholds the law -- or, at least, upholds most of it -- healthcare stocks could generally get a bit of a boost. A reduction in the number of uninsured would be a positive for the industry, as would an expansion of certain parts of Medicaid. The nuances of the proposed legislation are numerous and complex, so the range of possible outcomes is quite broad. But there are a couple of more targeted ETFs that figure to react to any news out of Washington this week.

iShares Dow Jones U.S. Health Care Providers Index Fund (IHF): If the new law is put into effect, the increase in Americans covered under insurance, could mean big healthcare providers benefiting quite a bit. That would reduce the number of non-paying customers at hospitals, which can be a significant burden on profitability. IHF includes about 45 healthcare-provider stocks, with allocations to hospitals, clinics, nursing homes and rehab centers.

SPDR S&P Health Care Services ETF (XHS): This ETF spreads holdings across the healthcare sector, with weights to healthcare-services stocks, managed healthcare firms and healthcare facilities and distributors. The general sentiment is that these stocks could benefit from the law being upheld, though managed healthcare firms could be better off if certain portions of the bill are struck down.

I'm bullish on all of these funds this week, based on the premise that the elimination of uncertainty -- even if not all the developments are positive -- will push up prices. The healthcare overhaul has been a dark cloud hanging over this corner of the market for the past two years. Investors have been uncertain of what impact, if any, that the various outcomes could have on this corner of the market. That cloud might not lift entirely when the justices finish hearing arguments this week, but it should clear up quite a bit in the next 48 hours. As the health care equation begins to clear up, look for these ETFs to gain some momentum and begin closing the gap on the broader market.

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