Investing in healthcare stocks can provide a long term return as they tap into a growing sector due to ageing, our rising population, and medical advancements such as digital health and technology. An exchange traded fund which has a digital health focus can help investors gain access to such companies.
Investing and what is an ETF?
Having an investment portfolio is a long-term way to accumulate wealth that can help many people when they are older. However, choosing individual stocks and staying up-to-date on the businesses can be time-consuming. It requires close attention and can lead to losses in capital or gains depending on the financial situation. For a majority of investors, ETFs or Exchange Traded Funds are a preferred way to accumulate a diversified portfolio. There are ETFs for every sector imaginable, or you can own ETFs of the entire S&P 500 or UK FTSE 100 too. They are flexible, easy to manage and allow investors to gain exposure to a basket of great companies without individually buying shares of each one.
Healthcare ETFs are funds that buy shares in a variety of healthcare-related companies. There is a long list of different sub-sectors within this specific sector. For example, you can invest in a healthcare technology-related ETF or one full of pharmaceutical companies.
But why healthcare?
As the global population continues to grow and the quality of life improves, healthcare is an industry that will continue to grow alongside our ageing population. Many investors like the sector because it is considered non-cyclical and should theoretically continue to grow as our population does. If someone is looking to construct a portfolio of ETFs, healthcare is an industry with upside and a high floor that can be defensive against sudden market volatility. Here we’ll compare two different ETFs, with one having a healthtech focus.
iShares Healthcare Innovation ETF
The Healthcare Innovation ETF from iShares was created and managed by one of the most well-known investment firms globally called Blackrock. It was first introduced to the markets in September 2016 and trades on several markets in Europe, including the Borsa Italiana, the London Stock Exchange, and the Frankfurt Stock Exchange. The fund is managed by Blackrock Ireland and is based in US dollars, with an ongoing charge of 0.40%.
With the Healthcare Innovation ETF, investors get exposure to a primarily US-based basket of stocks. While the fund has a 71% exposure to US companies, it also includes companies from other nations, including South Korea, Switzerland, Japan, and Germany. It holds 193 different stocks, with net assets of $1.85 billion USD in February 2022. The largest weighted holdings in this ETF are BioHaven Pharmaceutical Holding Company (NYSE:BHVN, Thermo Fisher Scientific Inc. (NYSE:TMO), and Abbvie Inc (NYSE:ABBV).
The biotech focus is clear. BioHaven is a clinical-stage pharmaceutical company that offers several FDA-approved treatments for migraines and other neurological issues. Abbvie is also a well-known biopharmaceutical company that is best known for its treatment Humira. The medication is used by people with rheumatoid arthritis and other autoimmune conditions. Why does iShares focus on biotech for healthcare innovation? Simply, the potential for revenue and growth from FDA-approved treatments is measured in billions of dollars. In Blackrock’s eyes, the future of modern medicine lies in pharmaceutical treatments.
L&G Healthcare Breakthrough ETF
The L&G Healthcare Breakthrough ETF is a fund that is managed by the Legal & General Investment Management Firm based out of London. This is a newer financial instrument than iShares Healthcare Innovation, as it debuted on July 2nd, 2019. It is similarly listed across various exchanges in Europe, including the London Stock Exchange, the SIX Swiss Exchange, and the Borsa Italiana. Once again, this ETF is also based in US dollars with an ongoing charge of 0.49%.
As with the iShares, the L&G Healthcare Breakthrough ETF has most of its holdings with US-based companies. At present, 80% of the companies held are based in the US, with the next highest region being Europe at 5.8% of the holdings. The largest weighted holdings are Tabula Rasa Healthcare (NASDAQ:TRHC), Abiomed (NASDAQ:ABMD), and Penumbra (NYSE:PEN). If you are familiar with the industry, you’ll notice a heavy emphasis on healthtech companies in this fund. Medtech or medical instrument stocks make up more than 27% of the holdings, followed by diagnostics, precision medicine, genomics, data analytics, telehealth and robotics. In short, it embraces the digitisation of healthcare.
Similarities and Differences
- Both funds trade on European exchanges
- Both funds have a heavily weighted priority to US-based companies.
- Both funds have a relatively even distribution of weight to each stock.
The highest weighted stock in the iShares Healthcare Innovation ETF is 1.48%, while the highest of the L&G Healthcare Breakthrough ETF is 1.8%. Unfortunately, the performance of both funds has been lacking so far in 2022 due to pressure on high-growth stocks and the market in general.
Each fund tends to have a different focus for the holdings, providing insight into how each specific fund defines healthcare technology. For iShares, the emphasis is on biotech companies. In terms of the L&G ETF, there is a solid lean towards digital disruption within the sector – This is to be expected as it tracks the Robo Global Healthcare Tech and Innovation Index. Another difference with L&G is the focus on genomics stocks like Fulgent Genetics (NASDAQ:FLGT) and Illumina (NASDAQ:ILMN).
L&G believes that the future is in medical technology and the ability to treat patients with robotics. Intuitive Surgical is an excellent example and it holds a high allocation. Its da Vinci surgical system is the leading robotic surgery technology globally, and in December 2021, the company hit a key milestone: 10 million surgical procedures completed worldwide.
Another example is iRhythm Technologies (NASDAQ:IRTC) which provides a cloud-based data analytics platform to track people with cardiac arrhythmias. It was founded in 2006 in San Francisco. Like Intuitive Surgical, iRhythm is also implementing AI into its technology.
Other Health ETFs
Global X has the EDOC ETF, which is its Telemedicine and Digital Health ETF. This fund has some familiar names, including iRhythm and Illumina, but with larger holdings on digital health services with companies like TelaDoc (NYSE:TDOC) and UnitedHealth Group (NYSE:UNH).
Virtus LifeSci Biotech Products ETF is one if biotech is more of a focus but the iShares Healthcare Innovation ETF isn’t quite enough. This fund gives you high exposure to companies like Biocryst Pharmaceuticals (NASDAQ:BCRX), Vertex Pharmaceuticals (NASDAQ:VRTX), and Biohaven as some of its highest weighted stocks.
Both ETFs have a solid portfolio of forward-thinking health stocks. The argument for iShares is that it is spread out over a much larger basket of stocks which generally leads to lower volatility. The ongoing charge is also slightly cheaper, and pharmaceutical research and laboratory companies tend to be a little less volatile than tech-based companies in general. L&G has excellent diversification across the healthtech sub-sectors and potentially has a higher future upside – It is suited for those who want specific exposure in the digital health space. While this industry is still in its infancy, it is likely to form a significant part of healthcare in the future, so it has the potential for a good return on investment. However, like all investments in equities, it does come with risks.
“For those who may not be interested in investing, ETFs can still be of incredible value to look into. Like mutual funds or an investment trust, the individual holdings, their values and weightings can change quickly; especially in challenging times and from speedy decisions from the managers. Still, it’s interesting to see which listed companies are of interest to financial institutions. It can be useful to research these companies and understand their plans. For example, we covered an iRhythm innovation when Once Daily was first launched in our shorter article series – We had been aware of their progress but had not come across Tabula Rasa Healthcare and some others. Interestingly, at present, in March 2022, L&G have a 6.7% allocation to telehealth, which seems initially surprising given the recent surge in adoption. However, it’s worth noting the future digital disruption slant of the ETF and that there are more specific telemedicine ETFs such as the Global X EDOC.” – Dr Vinay Shankar