Tuesday’s ETF To Watch: iShares U.S. Medical Devices Index Fund (IHI)

by on August 23, 2011 | ETFs Mentioned:

Given the ongoing weakness in the global economy, many investors have abandoned bets on risky sectors of the market and have instead focused their attention on traditional defensive segments. Thanks to relatively high growth prospects, health care has once again become a popular segment, due to its noncyclical nature and high barriers to entry. Yet, despite the sector’s relative safety, it has plunged along with the overall market in the past few weeks, taking names big and small down to lows for 2011. With that being said, things could change pretty quickly for the medical device corner of the market when Minnesota-based giant Medtronic (MDT) gives its quarterly update before the bell later today.

Medtronic is one of the largest medical device makers in the world and is especially prolific in its production of stents, spinal implants, and heart pacers, which account for the majority of the company’s total sales. However, these key businesses have been growing very slowly as of late as hospitals seek to cut costs across the board. In fact, sales of heart defibrillators have fallen off a cliff, down 25% in the last quarter, as worries regarding their overuse has prompted a backlash against the product by some. This is especially troubling given that the product is one of the best selling units for Medtronic so higher levels of growth in other segments will be necessary in order to make up for this shortfall [Five Alternative Health Care ETFs].

So far, investors remain unconvinced that MDT can do what it takes to return to higher growth levels; the company’s stock has fallen by 10% over the past year and close to 25% in the past three months alone. Both of these figures represent performance levels that are far worse than the S&P 500 during the same time frame as the broad index has outperformed MDT by nearly 1,600 basis points over the past year. Whether this negative sentiment will change later today seems uncertain, especially when looking at current analyst expectations. The consensus estimate calls for the company to post earnings of 80 cents a share on revenues of just under $4 billion. If realized, this will represent flat earnings growth from the year ago period but a modest increase in revenues, suggesting that profitability may be down for the company when compared to one year ago [Will ObamaCare Put Healthcare ETFs On Life Support?].

Thanks to this earnings report, investors should look for the iShares Dow Jones U.S. Medical Devices Index Fund (IHI) to remain in focus throughout today’s trading session. The fund devotes just over 10% of its total assets to MDT, enough to put the company in the top spot of the ETF’s holding list. As a result, today’s release could have a huge impact on the short term performance of IHI and could help to set the record straight on the outlook for one of the sector’s biggest players. This is especially important given how poorly IHI has held up over the past few months; the fund is down 19% in the past four weeks and is down just under 20% over the past quarter, not exactly great news for investors looking for a solid low volatility product. Due to this reality, if MDT is able to beat estimates or provide better guidance for the rest of the calender year, IHI could surge in Tuesday trading. If, however, investors see further weakness in this often overlooked corner of the market, we could see IHI resume its short term trend to the downside later today [see more holdings of IHI here].

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Disclosure: No positions at time of writing.