The US health sector is characterized by extreme spending compared to other developed countries:
One of the reasons behind it is the lack of competition as the hospitals are quite consolidated. That leads to extra administrative costs reducing the efficiency of healthcare. Unaffordability of healthcare led to the issues between the industry and politics; therefore, investing in US healthcare ETFs is associated with political risks.
In recent years the most notable growth in health expenditure is seen in the developing European countries, Chile and South Korea (See the comparison chart below).
The Healthcare Sector consists of the following industries:
- Drugs – The companies that manufacture drugs (biotechnology firms, pharmaceuticals firms, generic drugs firms)
- Medical equipment – The are different medical equipment makers. Some produce the simplest kinds of equipment, such as bandages or gloves, others design sophisticated ones like MRI machines and surgical robots.
- Managed Healthcare – These are firms that provide health insurance services.
- Healthcare Facilities – These firms manage hospitals, labs, clinics, nursing homes, etc.
Follow the healthcare trends with the ETF that suits you
Developed countries are characterized by an aging population that drives the demand in healthcare. In any country, biotech companies depend on the approval of the new drug or treatment from the regulative authorities such as the Food and Drug Administration (FDA) in the US, or European Medicines Agency (EMA) in Europe.
Some distinct trends are developing in health care worldwide.
Let’s look at some of them closer:
- Medical device technology – Focuses on the developments of cutting-edge devices for the treatment of patients by doctors or to be worn by patients.
- Gene editing and therapies –Treating genetic diseases by alteration of genes in human DNA.
- Liquid biopsy – The treatment approaches focused on the early detection of the diseases.
- Precision medicine – Developing the medications that suit the unique health characteristics of a patient, especially genetic characteristics.
Depending on the kind of investor you are, some areas of the sector can be more suitable than others. Conservative investors should target the biggest pharmaceutical companies, generic medicine producers, health insurers, and pharmacy retailers. Fundamentals such as growth prospects, valuation, financial strength, dividends, and metrics like P/E can be used to see the intrinsic value of an ETF’s holdings to confirm your outlook.
Less risk-aversive investors and short-term traders would be interested in exposure to small biotechnological companies. Many of the small biotechs are in the trial stages of their new products, hoping to be approved by the FDA. The information in the biotech industry is very asymmetric that creates opportunities for the great moves that can drive the sector. Once the investor identified a potential catalyst of the sector. Small biotech ETFs can be used to get the exposure to catch the short term-momentum.
We can tailor the exposure to the sector with the variety ETFs available:
Theme of exposure
SPDR® S&P Health Care Equipment ETF
Health care equipment and supplies
iShares US Medical Devices ETF
Manufacturing and distributing medical devices (scanners, X-Ray machines etc.)
iShares US Healthcare Providers
Hospitals, clinics, nursing homes
Principal Healthcare Innovators ETF
Developing therapeutics and vaccines
Global X Longevity Thematic ETF
Longer average life span
iShares Genomics Immnlgy & Hlthcr ETF
Genomics, immunology and bioengineering
Invesco DWA Healthcare Momentum ETF
Relative strength companies with potential for momentum.
ALPS Medical Breakthroughs ETF
Small and mid-caps that have drugs in Phase 2-3 of FDA clinical trials.
Loncar Cancer Immunotherapy ETF
Developing drugs and improving the body’s immune system to fight cancer
Virtus LifeSci Biotech Clinical Trls ETF
Companies that are offering a drug in Phase 1-3 clinical trial stage, before receiving marketing approval.
The Major Healthcare sector ETFs
Some ETFs are more appropriate for your portfolio than others due to their holdings. Let’s look at the biggest Healthcare ETFs in the table below.
Assets under management ($ mln)
Health Care Select Sector SPDR Fund (NYSE: XLV)
Vanguard Healthcare ETF (NYSE: VHT)
iShares Nasdaq Biotechnology ETF (NYSE: IBB)
As you see, the first two ETFs – XLV and VHT, are quite similar as they both belong to the Broad Healthcare industry. They almost resemble each other in their top holdings too. The top holdings of XLV are Johnson & Johnson – 10.10%, UnitedHealth Group Inc – 7.50%, and Pfizer Inc – 5.16%. VHT’s biggest stakes are Johnson & Johnson – 8.39%, UnitedHealth Group Inc – 6.24%, and Merck & Co Inc – 4.30%.
XLV and VHT would be more suitable for a conservative investor. The depth of holdings of both ETFs is great, although the holdings of VHT are more concentrated. Both ETFs are good for a sector rotation strategy.
IBB offers exposure to biotech companies. The ETF is well-diversified, holding over one hundred stocks of a different capitalization size, primarily domestically but also internationally. The portfolio structure protects the investor from the risks related to the extremely high volatility that’s caused by the developments of the individual companies. The top holdings of the fund are Amgen Inc – 8.44%, Vertex Pharmaceuticals Inc – 7.75%, Gilead Sciences Inc – 7.60%.
How to trade and how to invest in healthcare ETFs?
Let’s say you got interested in a particular trend in healthcare (already imagining yourself financing robot-surgeons and DNA engineers!). According to the trend you want to follow you’ve found what the specific area in healthcare you should be focused on. You’ve chosen the ETF(s) that are exposed to the area you’re interested in. Next, you looked through the biggest companies’ fundamentals to make sure that the “hard data” confirms your outlook.
Price action is king!
Regardless of the fundamental data and the personal outlook, it’s the price, and its dynamics are often the ultimate signal for further decisions. As the biotech industry is a less effective market, many momentum opportunities emerge. Breakout strategies would be suitable for this kind of market as the moves tend to be sudden and powerful.
Let’s break down the logic of the breakout trading (see the illustration of ALPS below):
- Find well-defined support or resistance that is tested at least three times (see the grey horizontal line).
- Wait until the market goes beyond the support or resistance and the candle closes on another side of the price level (circled candle)
- Your stop order in case you’re wrong will be behind the boundary of the pattern (red line).
- Expect the distance to the minimum profit target similar to the height of the channel (in our case the height of the channel equals $37-$31=$6. So, we can expect the market is going to $37+$6=$43).
The Healthcare sector offers tremendous growth opportunities. With an aging population in the developed countries and the vigorous advancement of innovations, healthcare provides an ever-growing market with countless possibilities in different sub-industries. FDA approvals and the phases of clinical trials are the main move catalysts in the sector. There is several current trends in healthcare that investors should pay attention to. We can invest with a particular ETF that focuses its holdings on the specific area of healthcare. Putting your money in the Healthcare ETFs like in any other sector must be based on strict risk management and a well-defined position management plan.