Why Is The Medical Devices ETF In The Spotlight?

Price-to-earnings (P/E) ratios have been rising over the course of the four-and-a-half year bull market. It follows that there are fewer and fewer bargains. Indeed, a quick screen at Morningstar reveals a dwindling universe of stocks with Forward P/Es that are lower than their respective five year averages.

Similarly, Morningstar is relatively stingy when it comes to handing out four or more stars on the ratings of individual securities. Thousands of stocks may be up for consideration. Right now, though, less than 200 make the cut.

When you combine the two criteria, one sub-sector has a large percentage of its total universe in the mix. Even more striking, this sub-segment that appears to stand apart has been widely covered in the media throughout the government shutdown. The industry? Medical Devices and Equipment.

Equipment makers/suppliers like Medtronic (MED), Covidien (COV), Baxter (BAX) as well as Abbott Labs (ABT) all showed up in the screening. Their respective prices are quite far from recent highs, in part because of the uproar over the probable implementation of the Affordable Health Care Act’s 2.3% tax on medical devices corporations. Nearly all Republicans oppose the unpopular tax, while a large chunk of Democrats want to see the tax removed from the law as well. Democrats, however, want to replace the potential $30 billion in tax revenue before signing off on repealing the medical devices tax.

At the moment, few Democrats have indicated that they would cross the current party line; that is, until the GOP in the House passes an unencumbered bill to fund government operations, and until the same Republicans agree to raise the debt ceiling without preconditions, there will be no negotiations. Indeed, medical device providers may have to pick up part of the tab for universal health care after all.

Regardless, iShares Medical Devices (IHI) remains in a bona fide uptrend. The exchange-traded asset has received support near a shorter-term 50-day moving average throughout the year. Moreover, the current price is above both a 50-day as well as a 200-day trendline, sitting not far from an all-time peak.

Whereas shares of some of the component corporations have taken a beating, this diversified vehicle still remains popular. Perhaps a deal to vanquish the medical device tax would make the asset even more attractive to would-be buyers. Then again, there is no telling how long it will take for partisan politics to run its course. Medical Devices (IHI) would not be immune to panicky selling should stock investors start stampeding for the exit door.

Disclosure: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc, and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert web site. ETF Expert content is created independently of any advertising relationships.