Surprisingly, Politicians Could Boost Medical Device ETFs

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 ETFs that track those equities.

As has been previously noted, medical device ETFs, such as the iShares Dow Jones U.S. Medical Devices Index Fund (NYSE:IHI) and the Health Care Equipment ETF (NYSE:XHE), 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 makers.

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That is unless a group of 17 Democratic senators have their way and get the medical device tax repealed.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:MDT), Covidien (NYSE:COV), Thermo Fisher Scientific (NYSE:TMO), Intuitive Surgical (NASDAQ:ISRG) and Stryker (NYSE:SYK).

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 Michigan.

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 (NYSE:ZMH), Minnesota-based St. Jude Medical (NYSE:STJ), California's Varian Medical (NYSE:VAR) and Boston Scientific (NYSE:BSX) and Waters (NYSE:WAT), 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.

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