ETFs To Watch As Obamacare Hits Deadline [PowerShares Dynamic Pharmaceuticals(ETF), SPDR S&P Biotech (ETF)]

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March 31, 2014 5:09pm NYSE:FXH NYSE:PJP

healthcare-etfsDespite the rocky start and a plethora of technical issues, the Affordable Care Act (often known as Obamacare) saw a surge in enrollment in the final days of its first year program. More than 6 million Americans (as of March 27) have signed

up for medical insurance under this healthcare law since October 2013, meeting the administration’s revised projection.

The boost came from the last-minute sign ups as one million Americans opted for enrollment in the middle of March alone. Additionally, it appears that millions of consumers are interested in this health insurance coverage as it hits deadline.

This is particularly evident from the recent data provided by the the Centers for Medicare & Medicaid Services, which showed record consumer demand with more than 8.7 million visits over the past week, including 2 million in the last weekend. If these site visits turn into people actually selecting plans, the final enrollment numbers could beat the administration’s original goal of 7 million.

Given the rising demand, President Obama has extended the deadline for those Americans who could not apply before because of some technical problems or standing in line for long at call centers. Those consumers could begin the process today and receive a grace period of 7 days for completion.

With that being said, the actual enrolment numbers are expected to come by mid next month. The expectation for a larger base of insurers under the Obamacare put several healthcare stocks and the ETFs in focus for the coming weeks.

This is because the larger number of insured Americans would be able to afford medicines under the law that would push revenues higher for both biotechnology and pharmaceutical companies, which in turn would lead to more profits. Below, we have highlighted three ETFs that could be major beneficiaries of Obamacare and should be closely monitored by investors in the days ahead to tap the opportunity, when it arises.

Any of the three products seems would be a compelling choice as these have a Zacks Rank of ‘1’ or ‘2’, suggesting that these will likely outperform the broad market index over a one-year period (see: all the Healthcare ETFs here):

PowerShares Dynamic Pharmaceuticals Fund (NYSEARCA:PJP)

This is by far the most popular choice in the pharma corner of the healthcare segment that follows the Dynamic Pharmaceuticals Intellidex Index. The product has a good level of AUM of over $1.1 billion and sees solid volume of roughly 247,000 shares a day. The fund charges 63 bps in fees and expenses from investors.

Holding 29 stocks, the fund is pretty spread out across each component, as no firm holds more than 5.7% of assets. It has a definite large cap focus and Johnson & Johnson (JNJ), Pfizer (PFE) and Merck (MRK) occupy the top three positions in the basket.

In terms of industrial exposure, 72% of assets are allocated to pharmaceuticals while 22% and 6% are allotted to biotechnology and medical equipment, respectively. The product has added nearly 3.6% so far this year.


This fund is by far the most popular choice in the biotech corner of the healthcare segment. The fund tracks the S&P Biotechnology Select Industry Index and holds about 84 securities in its basket. The product has roughly $1.3 million in AUM and trades about 460,000 in volume a day, while its cost is just 35 basis points a year.

The ETF uses an equal weight methodology, minimizing company-specific risks. About three-fourths of the portfolio is tilted toward small and micro caps, leaving less exposure to large and mid caps. XBI is up nearly 5.8% in the year-to-date time frame (read: 3 ETFs Tumble Most on Biotech Sell-off).

First Trust Health Care AlphaDEX Fund (NYSEARCA:FXH)

This fund provides broad exposure to the broad healthcare space by tracking the StrataQuant Health Care Index. It is one of the popular and liquid ETFs with AUM of around $1.9 billion and average daily volume of 350,000 shares a day. Expense ratio came in at 0.70%.

In total, the fund holds 74 stocks in its basket with a definite tilt toward the large cap. Each security holds less than 2.8% of assets, suggesting lower concentration risk. Health care providers & services is the top sector with nearly one-third allocation, followed by pharma (23.5%) and biotech (17.2%). The ETF has added nearly 4% so far this year.

Bottom Line

These products are clearly outpacing the broad market fund by a wide margin over the past three months. Apart from Obamacare boost, the products would also benefit from encouraging industry trends such as increasing mergers and acquisition activities, promising new drugs, growing demand in emerging markets, an aging population and ever-increasing healthcare spending.

Given this, investors should take a closer look to these products and participate in the upcoming lift resulting from Obamacare.

This article is brought to you courtesy of Eric Dutram.

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