More Pain Awaits Medical Device ETFs

Select health care ETFs are outperforming the broader market today, though that is not saying much given that the S&P 500 is down almost 1.9 percent as of this writing. Two examples of the sector's post-Election Day outperformance include the Health Care Select Sector SPDR (NYSE:XLV) and the Market Vectors Pharmaceuticals ETF (NYSE:PPH), which are off 1.6 percent and one percent, respectively.

The relative sturdiness of PPH, XLV and rival ETFs is no surprise following President Obama's easy reelection victory Tuesday night. Leading up to the election, it was widely expected health care ETFs would be beneficiaries of a second Obama term as traders speculated Republican rival Mitt Romney might try to undo Obamacare if elected.

XLV, which is heavy on blue-chip pharmaceuticals names such as Johnson & Johnson (NYSE:JNJ), Pfizer (NYSE:PFE) and Merck (NYSE:PFE), was highlighted by analysts as one ETF investors should embrace should Obama win.

However, while XLV, PPH and comparable might eventually keep their bull runs going in the wake of Obama's easy Tuesday night victory, one sub-sector of the health care space looks vulnerable. That being medical device manufacturers.

In March, Benzinga reported that medical device makers and the corresponding ETFs could be traders' cross-hairs if Obamacare was implemented to its fullest extent. As a study by the Battelle Technology Partnership Practice highlighted, Obamacare contains a job-killing, GDP-sapping tax on medical device makers.

Battelle, which appears to be non-partisan, said the medical device featured in Obamacare could lead to the loss of tens of thousands of jobs and billions of dollars of lost GDP for the U.S.

On a related note, it appears at least some traders realize medical device names need to be avoided, at least in the near-term. The iShares Dow Jones U.S. Medical Devices Index Fund (NYSE:IHI) is off almost 2.1 percent today. The rival SPDR Health Care Equipment ETF (NYSE:XHE), which is more of an equal product, is lower by the same amount.

To be sure, these are not the most popular ETFs on the market. IHI and XHE combine for less than $294 million in assets under management. The former's average daily volume is less than 41,000 shares per day. XHE's average daily turnover is barely above 3,300 shares.

Still, these ETFs are home to some of the most familiar names in the medical device sub-sector. For example, Medtronic (NYSE:MDT), Intuitive Surgical (NASDAQ:ISRG) and St. Jude Medical (NYSE:STJ) combine for over 23 percent of IHI's weight. Medtronic is down almost three percent today while St. Jude is approaching a four percent loss.

Practically speaking, dangers loom for IHI and XHE. Arguably, many investors are not aware of the "stealth" medical device in Obamacare. President Obama would not have been wise to run around touting the tax and he did not. Investors might also be apt to be an ETF such as IHI as a success under the first Obama term. After all, in three-year period ending on Election Day, the ETF had surged almost 41 percent, including paid dividends.

It is that performance that might explain why the medical device tax got so little mainstream media coverage in the days leading up to the election. The Wall Street Journal and USA Today did prominently mention the issue, but it was not exactly on display in other major mainstream media outlets.

Fortunately for investors, the IHI and XHE gave some clues that departure time was drawing near. In the month leading up to Election Day, XHE plunged 6.3 percent, more than double IHI's loss. The ETF's are giving more clues today. If IHI drops another one percent, it will dip below its 200-day moving average and that is a bearish sign.

For more on ETFs, click here.