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Health Insurers: If You Can’t Beat Them, Join Them

Summary I believe the iShares U.S. Healthcare Providers ETF is worth considering adding to portfolios. There are three growth drivers for the health insurance industry: Above Market Sales Growth, Potential Cost Controls and less competition. With little chance of Obamacare being significantly changed or replaced anytime soon, health insurers will continue to report record revenues for an extended period of time. In this article, I will be explaining why I believe the iShares U.S. Healthcare Providers ETF (NYSEARCA: IHF ) is worth considering, because IHF has a large exposure to health care insurers. The reason I am focusing on health care insurers is I recently received a letter from my insurer saying my health care insurance plan would canceled and thus I have to find new insurance. The new plan Regence BlueCross BlueShield suggested for me was the “cheapest” premium plan that the company offers, which is what I was looking for. I am a healthy 29 year old and I have not needed to go to the doctor for years, and only for minor items like a sinus infection etc, therefore a cheap plan is ideal for me. However, the new “cheap” plan costs 156% more [yes you read that correctly] than my current plan, and thus is the reason I started looking at IHF because of its large exposure to health insurers. If my wallet is going to be emptied by health insurers, I might as well invest in health insurance stocks to minimize the impact of the significantly higher premiums I would have to pay. This is a massive opportunity for insurers when they are able to cancel plans like mine and charge significantly higher rates to healthy individuals who do not use their health insurance or use it sparingly. Growth Drivers Driver #1: Above market sales growth Health Insurers make up just over 52% of the holdings of IHF and over the last five years IHF has had a total return of just over 155% compared to a nearly 91% total return for the SPDR S&P 500 Trust ETF (NYSEARCA: SPY ). (click to enlarge) [Chart from dividendchannel.com] This outperformance is driven by the above market growth that health insurers have had over the last five years. The average sales growth for Aetna (NYSE: AET ), Anthem (NYSE: ANTM ), Cigna (NYSE: CI ), Humana (NYSE: HUM ) and United Health (NYSE: UNH ) over the last five years has been 10.76% compared to 6.64% for the average of all S&P 500 companies. When health insurers cancel plans like mine, and charge exorbitantly higher rates for new plans as well as continuing to raise rates for everyone else, it is easy to see that sales will continue to grow at a faster pace than the rest of the S&P 500. Driver #2: Prescription drug cost controls Recently Hilary Clinton announced her plan to try to control and lower the costs of prescription drugs. If prescription drug cost controls were to be put into place, health insurers would be the big winner in my opinion. If prescription drug costs are significantly reduced under the type of plan proposed, do you think health insurers would pass that cost savings to consumers? In my opinion there is no way that health insurers would pass these cost savings onto consumers through lower premiums. Therefore, if premiums remain the same and/or continue to grow and insurers have to pay less for prescription drugs their margins would expand significantly. Driver #3: Less competition With Aetna purchasing Humana and Anthem purchasing Cigna both within the last couple months, this will mean even less competition for health insurance at a time when more competition is what is needed. If both these mergers pass regulatory approval, consumers will not have as many choices when it comes to health insurance options. In a recent Forbes article, it quoted supporters of the deal saying: Aetna and Humana and supporters of the deal say the larger insurer would allow the plans to extract price cuts from doctors and hospitals, which would be a good thing. Yes, it would be a good thing if costs came down, but as I noted above, in no way do I believe that insurers would pass those costs savings onto customers through lower premiums. Closing Thoughts In closing, I believe the iShares U.S. Healthcare Providers ETF is worth considering adding to portfolios because of its 50%+ allocation to health insurers, which have strong tailwinds given that it is likely Obamacare is not going anywhere anytime soon. With significantly higher sales growth rates than the rest of the S&P 500, the potential for higher margins because of cost controls and less competition, it is easy to see that health insurers will continue to be highly profitable and a great option for those looking to offset premium increases. The statement from the Aetna CFO says it all: We grew operating revenue to a record quarterly level of over $15.1 billion, driven by higher premium yields and year-over-year growth in medical membership. – AET Transcript Disclaimer: See here .

Taking Stock Of International ETFs After The Sell Off

Summary Exchange-traded funds (ETFs) that track international markets started the year with tremendous promise that ultimately lost ground to a host of fundamental concerns. The hazards in China and Brazil have been well documented and weighed as a primary concern for growth in emerging market countries. The combination of these issues alongside the volatility in U.S. stocks has led to wide-spread selling in broad-based indexes over the last five months. Exchange-traded funds (ETFs) that track international markets started the year with tremendous promise that ultimately lost ground to a host of fundamental concerns. Despite the best efforts of the European Central Bank to stimulate economic growth through quantitative easing programs, both developed and emerging markets overseas have seen momentum vanish in 2015. The hazards in China and Brazil have been well documented and weighed as a primary concern for growth in emerging market countries. In Europe, the fiscally conservative German stock market was rocked by the Volkswagen scandal alongside other financial worries. The combination of these issues alongside the volatility in U.S. stocks has led to wide-spread selling in broad-based indexes over the last five months. The iShares MSCI EAFE ETF (NYSEARCA: EFA ) is the largest international exchange-traded fund with over $56 billion in total assets. EFA tracks 900 stocks in both developed and emerging foreign markets. In its market cap weighted form, the top country allocations are Japan, United Kingdom, and France. Since hitting a high in May, EFA has fallen more over 18% to the September low – just barely avoiding a drop into bear market territory . This route was initially started by weakness in emerging markets, but has seen Europe join in to drive prices lower in recent months. Like nearly all risk assets, the October rally has led to some relief of the selling pressure in EFA and barely pushed the index back into the black for the year. Another key item of note in international markets is the price action of the U.S. dollar, which sent so much money spinning into currency-hedged ETFs at the beginning of the year. The P owerShares DB USD Bull ETF (NYSEARCA: UUP ) has been decidedly flat over the last five months. Recent price action may even suggest a mild downside bias, which could lead to a test of support at $24.50 in the near future. ETFs such as the WisdomTree Europe Hedged Equity ETF (NYSEARCA: HEDJ ) benefited from the rise of the dollar as the built-in currency arbitrage worked as a tailwind in the first half of the year. Now there is less of a convincing case that the U.S. dollar will continue its rally and lend weight behind the currency hedged theme. A falling dollar would ultimately make a traditional international fund such as the Vanguard FTSE Europe ETF (NYSEARCA: VGK ) a more attractive near-term opportunity. Of course, this is predicated on the expectation that the October rally in global stocks has further room to run through the end of the year. I would sum up the state of international markets in the following bullet points: From a pure price perspective, broad-based international ETFs were leaders on the upside and consequently leaders on the downside relative to U.S. markets this year. That makes them a more aggressive play for those that are positioned for a rebound. While it appears that there are sound fundamental and technical reasons to avoid international stocks, they still offer compelling upside opportunity in the context of a well-diversified portfolio. Your allocation to this sector will likely be governed by your overarching risk tolerance. For core international exposure , I believe that it’s important to stick with broad-based indexes rather than trying to hand pick specific countries or sub-regions. The risk of hits and misses in concentrated areas make for a less compelling investment proposition. International investors should also keep one eye on the currency trends as well. Even if your fortunes aren’t tied to a currency-hedged ETF, there are still important correlations that can be gleaned from observing forex markets. Remember that a higher dollar (lower euro) favors currency-hedged positions, while a lower dollar favors traditional un-hedged exposure. The Bottom Line Growth-oriented investors can still benefit from a strong comeback in international stocks given the backdrop of global stabilization. However, it is imperative to have a counterintuitive mindset that allows you to identify opportunity on the way down and curb your enthusiasm in the late stages of a rally. Be mindful of the inherent volatility in international ETFs versus the major U.S. indexes as well.