ETF Investors Look to Healthcare Stocks

The S&P 500’s Healthcare sector has returned 18% in the year-to-date, almost twice that of the wider index’s 9.5% - and ETF investors are getting in on the act

David Brenchley 13 September, 2018 | 3:00PM

Pfizer logo, Pfizer building, healthcare, exchange traded funds, ETFs, US stock market

Flows into ETFs in general have slowed this year, and investors are becoming more discerning. Rather than broad-based market funds, sector-specific ETFs have become more popular led, unsurprisingly, by technology funds.

However, healthcare equities are not far behind. According to Morningstar Direct data, European investors have pumped €1.25 billion into ETFs in the Healthcare Sector Equity Morningstar category year-to-date. Most of those flows came in June, July and August.

In fact, August’s €395 million of net inflows was the best monthly figure since November 2016, which coincided with the US Presidential election.

The US is a major player in healthcare, with many of the top drugs makers listed across the pond. The S&P 500’s Healthcare sub sector has returned 18.22% in the year-to-date, almost twice that of the wider index’s 9.5%.

In fact, it’s a trend that continues, with the sub-sector beating the wider market every year since 2013. Cumulatively, in that time, it’s advanced almost fivefold, compared to the S&P 500’s 128%.

On a wider scale, the MSCI ACWI’s Health Care index is up 11% in the year to 31 August, compared to the MSCI ACWI’s 3.77% and MSCI World’s 5.26%. However, on a global basis, the health care index underperformed the broader market indices in both 2017 and 2016.

China to Drive Healthcare Earnings

Now, though, things are looking up. Drugs makers have recently seen an explosion in sales in China. During the second quarter of 2018, both AstraZeneca (AZN) and Pfizer (PFE), in its Essential Health business, saw China sales rise 24%. Merck & Co, meanwhile, reported a 50% increase in sales.

And Ethan Lovell, co-portfolio manager of the Janus Henderson Global Life Sciences fund, thinks this exceptional growth will continue.

An ageing population that is becoming increasingly wealthy will help accelerate the trend, as will Government initiatives such as expanded access to affordable care and a quicker review process for new therapies.

“This could all lead to potentially faster sales growth for biopharmaceutical companies in China,” says Lovell. An economic slowdown is a risk, of course, but the manager notes that the Government has signalled its commitment to supporting healthcare spending with biomedicine named as one of the country’s seven strategic priorities.

In time, China could turn into “a new and significant source of growth for global biopharmaceutical companies”.

Healthcare ETFs Gain in Popularity

The iShares S&P 500 Health Care Sector ETF (IUHC) has been one of the most popular funds in 2018, with inflows of €546 million. But healthcare investors have also been more globally focused in their approach.

Xtrackers MSCI World Health Care ETF (XDWH) and Lyxor MSCI World Health Care ETF (HLTW) both took in over €180 million in the year-to-date.

All three of these have big exposure to the US, with the likes of Johnson & Johnson (JNJ), UnitedHealth (UNH) and Pfizer all featuring in the top three holdings.

Elsewhere, the iShares Healthcare Innovation ETF (HEAL) has also been popular and attracted €176 million. While still having almost half its portfolio in the US, it invests more in the mid- and small-cap space.

The fund says it tracks an index composed of firms across the world that are generating significant revenues from specific sectors focused on pushing the boundaries in medical treatment and technology.

Top holdings include DexCom (DXCM), which makes systems to treat diabetes; Sarepta Therapeutics (SRPT), which develops products to address serious diseases; and Korean company Amicogen (092040), which develops and produces enzymes and healthcare food.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
Amicogen Inc29,500.00 KRW-2.96-
AstraZeneca PLC6,251.00 GBX1.28
DexCom Inc141.81 USD-5.12
iShares Healthcare Innov ETF USD Acc6.13 USD-4.07-
iShares S&P 500 Health Care Sect ETF$Acc6.65 USD-0.95-
Janus Henderson Glb Life Scn U GBP Acc33.05 GBP-0.48
Johnson & Johnson145.62 USD0.19
Lyxor MSCI World HealthCare TR ETF C USD319.38 USD-1.51
Pfizer Inc44.11 USD-0.38
Sarepta Therapeutics Inc120.82 USD-3.70-
UnitedHealth Group Inc272.38 USD-1.51
X MSCI World Health Care ETF 1C32.72 USD-1.07

About Author

David Brenchley

David Brenchley  is a Reporter for Morningstar.co.uk