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Top-Ranked ETFs in Focus on Rumored CVS-Aetna Deal

After a deluge of strong earnings reports from tech titans, the biggest story on Wall Street is the potential buyout of Aetna AET by CVS Health Corp CVS. This is especially true, as a drug chain and a pharmacy giant CVS has proposed to acquire the nation's third-largest health insurer Aetna for more than $200 per share, or around $66 billion according to various sources.

This would represent the biggest deal of the year and the first tie-up of a retailer, an insurer and a pharmacy benefit manager in history. As such, the proposed deal would change the landscape of healthcare business as well as streamline and cut costs in the drug supply chain.

The merged company would create a one-stop shop for customers' health care needs, ranging from employer healthcare and government plans to managing benefits and running drug stores. By owning Aetna, CVS will become the first triple healthcare player: a drugstore, a pharmacy benefit manager and now an insurer. It would be in a better position to negotiate discounts with drug manufacturers. This is because CVS is one of the key players in the pharmacy benefit management business in the United States and often negotiates drug benefits for insurance plans and employers.

Additionally, the combined company could pose a bigger threat to UnitedHealth Group Inc. UNH, the largest U.S. health insurer having its own pharmacy benefits unit (read: Ride On UnitedHealth Q3 Strength with These ETFs).

The move is also to stave off threats from Amazon.com Inc AMZN, which is making huge expansion into the world of pharmaceutical drugs and has already received pharmacy-wholesaler licenses in a dozen states.

However, the transaction is expected to attract high antitrust scrutiny because of its sheer size and overlaps in Medicare Part D, a government program to subsidize prescription drug costs. Notably, CVS has a market capitalization of $77.76 billion while AET has a market cap of $53.35 billion. As such, the approval of the transaction might call for certain divestitures of Medicare prescription drug contracts.

ETF Impact

The proposed merger has put the spotlight on a few healthcare and consumer ETFs that could be the best ways for investors to tap the opportunity arising from the CVS-AET deal. These funds have a solid Zacks ETF Rank #2 (Buy), suggesting their outperformance in the coming months.

iShares U.S. Healthcare Providers ETF IHF

This ETF follows the Dow Jones U.S. Select Healthcare Providers Index with exposure to companies that provide health insurance, diagnostics and specialized treatment. In total, the fund holds 45 securities in its basket with Aetna occupying the second position, accounting for 7.3% share. The fund has amassed $482.5 million in its asset base while volume is light at about 26,000 shares per day on average. It charges 44 bps in annual fees (see: all the Healthcare ETFs here).

iShares Edge MSCI Multifactor Consumer Staples ETF CNSF

The fund targets companies that have the potential to outperform the broad U.S. consumer staples sector and tracks the MSCI USA Consumer Staples Diversified Multiple-Factor Capped Index. Holding 28 stocks in its basket, CVS Health takes the fifth spot, accounting for 5.8% of the portfolio. In terms of industrial exposure, more than half of the portfolio is dominated by food beverage tobacco while food & staples retailing, and household and personal product take the remainder with a double-digit exposure each. This ETF has attracted $2.5 million in its asset base and trades in a meager volume of about 200 shares. It charges 35 bps in fees per year.

VanEck Vectors Retail ETF RTH

This fund provides exposure to the 26 largest retail firms by tracking the MVIS US Listed Retail 25 Index. Of these, CVS takes the sixth position with 5.04% share. The ETF has a certain tilt toward specialty retail, which accounts for 31% of the portfolio with 31%, while Internet direct marketing (22%), hypermarkets (12%), departmental stores (10%), and healthcare services (9%) round off the next four spots. The product has amassed $50.5 million in its asset base and charges 35 bps in annual fees. Volume is light as it exchanges more than 11,000 shares per day (read: Profit from Retailers' Defaults With These ETFs).

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Amazon.com, Inc. (AMZN): Free Stock Analysis Report
 
VANECK-RETAIL (RTH): ETF Research Reports
 
ISHARS-US H C P (IHF): ETF Research Reports
 
ISHRS-EMS MCS (CNSF): ETF Research Reports
 
Aetna Inc. (AET): Free Stock Analysis Report
 
UnitedHealth Group Incorporated (UNH): Free Stock Analysis Report
 
CVS Health Corporation (CVS): Free Stock Analysis Report
 
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