Best Healthcare ETFs: 5 Key Questions for Investment Considerations
With the continuous evolution of medical breakthroughs and demographic shifts, the healthcare sector has solidified its status as a cornerstone of both societal well-being and investment portfolios. For investors seeking a diversified exposure to the sector, healthcare exchange-traded funds (ETFs) represent a cost-efficient option. In this Q&A article, we spoke with Séverine Piot-Deval, a healthcare investment specialist and author of Healthcare Corner, to unpack the investment considerations when it comes to healthcare ETFs.
Selecting healthcare ETFs
Hedder: The healthcare sector encompasses a wide range of industries, from pharmaceuticals to biotechnology, medical devices, and healthcare services. What factors should investors prioritize when selecting a healthcare ETF that offers comprehensive exposure to this diverse field?
Séverine: First, when selecting any ETF, investors can check the assets under management (AUM) as a proxy for liquidity, and the way the ETF has tracked its reference index over time, as well as its expense ratio. For actively managed ETFs, such as ARK’s genomic revolution, investors should assess the investment process and the management team as they would for a mutual fund.
For healthcare ETFs specifically, it depends on the kind of risk reward they are looking for. A pharmaceuticals ETF would generally display stable growth, although at present the industry is under strain from patent expiries. Biotechnology tends to be more volatile, but some ETFs provide exposure to the big biotechs, which share a lot of characteristics with big pharma (established products, strong balance sheets). Medical devices tend to be linked to the economic cycle and to work at the later stages of an economic expansion.
Demographics and healthcare demand
Hedder: As the global population ages, healthcare demands are expected to rise. How do healthcare stocks tap into this demographic trend, and which sub-sectors are particularly well-positioned for growth in the coming years?
Séverine: Aging populations, changes in lifestyle, together with the corresponding rise in chronic illnesses ranging from obesity and diabetes to dementia, are important drivers for all the sub-sectors of healthcare. Drugs for the treatment of obesity and diabetes, neurological diseases, cancer, dementia for instance have strong potential, as do outpatient care facilities and monitoring, elderly homes, and devices for the treatment of diabetes, cardiovascular diseases, pain and joint replacement.
Pharmaceuticals: a key sub-sector of healthcare
Hedder: Pharmaceutical companies often play a significant role in healthcare ETFs. How should investors assess the potential impact of drug approvals, clinical trial results, and patent expirations on the performance of these ETFs?
Séverine: ETFs replicate an index. As a result, investors cannot pick stocks, buying the ETF will give them exposure to the full index, and given that indices are market-cap weighted (there are a few equal-weight ETFs), a healthcare ETF will carry a significant exposure to pharmaceuticals. If you are afraid that patent expiries will hamper the performance of some big caps, you may want to avoid broad healthcare ETFs and choose a biotech, medtech or healthcare services ETF.
In all cases, the main holdings are disclosed. With the ten main holdings representing some 40% of a typical healthcare fund, investors can assess where the biggest risks and opportunities are.
Healthcare ETFs with global exposure
Hedder: Healthcare is a global industry with varying regulations and healthcare systems. Are there healthcare ETFs that provide international exposure, and what should investors consider when evaluating the potential benefits and risks of investing in foreign healthcare markets?
Séverine: Major US healthcare stocks do have international exposure, so buying a US healthcare ETF does provide exposure to ex-US markets. However, some of the major global healthcare companies are European, and there are global ETFs that allow to invest in the likes of Novartis or Novo Nordisk. The benefits are better diversification and access to some high quality stocks, and the risks are mainly linked to exchange rates.
Healthcare ETFs as a long term investment
Hedder: Investor timelines and goals can differ. Are there healthcare ETFs suitable for long-term growth versus those better suited for short-term gains or hedging strategies? How can investors align their investment horizon with the appropriate ETF choice?
Séverine: Once again, ETFs track indexes, and the general rule with stocks is that it is better to hold them for long. In the case of healthcare, the long term trend is favorable, and the sector tends to outperform the market overtime, but it may underperform during certain micro (patent expiries) or macro (strong economic expansion) cycles, so investors should buy it for the long run. I am not sure I would qualify it as hedging, but buying healthcare, and in particular pharmaceuticals, ahead of a recession is a good strategy to mitigate losses.
For short term gains, medtech ETFs can be bought in the middle of an economic expansion, and very specific ones like the above mentioned genomics ETF are a good way to play an innovation cycle.
Related readings:
Healthcare Investing: A Deep Dive
Investing in Biotechnology: A Deep Dive
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.