|Healthcare: Rides Demographic Ageing Theme
The global Healthcare sector is one of the best ways to play the demographic theme of global ageing in developed economies (Germany, Japan, US, China).
This is driving an explosion in the need both for drugs for age-related illnesses such as cancer, and also long-term elderly patient care.
According to the World Bank, the US already spends over 17% of GDP on Healthcare, while in Europe Healthcare represents between 9% and 12% of GDP.
Since 2000, the Healthcare sector has consistently outperformed the broader stock market.
|Healthcare Sector Not Just Low Volatility
The well-known Capital Asset Pricing Model (CAPM) suggests that the higher your risk, the higher your expected return.
However, the pharmaceutical sector displays historical outperformance versus broad equity markets despite lower volatility and a lower beta.
The S&P Health Care sector has outperformed the S&P 500 index over different time horizons.
This cannot be explained simply by the Low Volatily anomaly; since 2013, the XLV Healthcare ETF has outperformed the S&P Low Volatility ETF (SPLV) by a wide margin.
|Healhcare subsectors: Services, Biotech, Pharma
While the XLV SPDR Sector Select Healthcare ETF is the mots popular of the US Healthcare ETFs by assets under management, there is a wealth of choice in Healthcare ETFs.
Popular Healthcare ETFs include Healthcare Services (XHS: includes hospitals, clinics, health insurers), a recent beneficiary of US Obamacare.
Biotechnology is represented by several ETFs (IBB is the largest), giving a much more growth-oriented focus on new, innovative drug development.
The XPH SPDR Pharmaceutical ETF is a modified equal-weight index that only contains pharmaceutical companies.
|XLV v. Smart Beta Healthcare Choices: PJP, FXH
The S&P Healthcare index (on which XLV is based) offers exposure to the S&P 500’s companies involved in the health care sector, weighted by market capitalisation.
While XLV is the largest Healthcare ETF in the US, there are attractive Smart Beta ETF alternatives in Healthcare, offered by ETF providers Invesco Powershares and First Trust.
Both the PJP Powershares ETF and the FXH First Trust ETF select and weight components from the Healthcare sector according to a combination of fundamental, valuation and momentum criteria. Both PJP and FXH ETFs have outperformed XLV since 2010.
|Smart Beta Healthcare Indexes: the case of Dynamic Pharmaceutical Intellidex Index
Beyond the “Return/Beta” anomaly described above, some new indexes have been launched which aim to beat market capitalisation indexes.
The Dynamic Pharmaceutical Intellidex Index stands out of the crowd, since it includes numerous quantitative filters, such as earning momentum, and qualitative factors, such as management action, which is usually not included in traditional indexes’ construction.
Furthermore, this index comprises only 30 stocks and has delivered a good risk/return track record.
|PowerShares Dynamic Healthcare (PJP US)
The PowerShares Dynamic Healthcare ETF is an ETF that tracks the Dynamic Pharmaceutical Intellidex index. The ETF is at least exposed to this index as high as 90% of its assets. The fund is rebalanced four time a year to avoid a fast widening tracking error.
At the end of June, the ETF’s portfolio included 25 securities from the index’s 30 stocks.
As for its underlying index, the pharmaceuticals represent the largest weight of the portfolio (65,3%), while biotechnology is the second position (27%) and the health care equipment the lowest (7,7%).
This ETF is listed on the NYSE.
|Sources: Idle Investor Research Limited, S&P DJ Indices, SSGA SPDR, First Trust, PowerShares|
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