Emerging markets healthcare ETFs to benefit from growing wealth and government spending

Aug 29th, 2012 | By | Category: Equities

As growing wealth and government spending create increasing opportunities, pharmaceuticals, medical technology and healthcare infrastructure are among attractive investments in emerging markets, according to The Boston Company Asset Management.

Emerging markets healthcare ETFs to benefit from growing wealth and increased government spending

Emerging markets healthcare ETFs are likely to benefit from growing wealth and increased government spending.

These trends are identified in a recent report from the Boston-based firm, which predicts the healthcare segments that are poised to benefit from continuing economic development in emerging markets.

The expansion of the emerging markets middle class is enabling a growing portion of the population to afford essential care, and increasing government investment in public healthcare systems also is driving growth for health care services, the report noted.

“While the rise in wealth is rapidly transforming healthcare in emerging markets, significant challenges remain,” said Frank J. Goguen, senior research analyst and a co-author of the report. “Investing in the sector requires a selective and fundamental approach to uncover quality companies that will capitalise on the secular growth trends inherent in emerging markets health care.”

As an example of the opportunities and obstacles in emerging markets healthcare, the report points to the rapid expansion of health insurance and the pharmaceuticals industry in China. Yet, among the obstacles that China must surmount are inefficient distribution of pharmaceuticals and a hospital system that often provides haphazard and unreliable levels of care, the report said.

The report points to other trends, both positive and negatives. These include the projected growth of the pharmaceuticals industry in Russia and the overwhelming effects healthcare expenses have on rural poverty in India.

Brazil, like its BRIC counterparts, must contend with overcrowded hospital waiting rooms and under-trained operators of medical equipment, the report said. However, The Boston Company sees growth in Brazilian private health insurance and increased public funding for medical facilities and training.

“Success for these emerging countries ultimately will be measured by a rise in life expectancy, a decline in child mortality rates, and healthy economic growth,” Goguen said.

The report is well worth a read: Global Wealth Creation: The Impacts on Emerging Markets Health Care.

For investors seeking broad exposure to the emerging markets healthcare sector, rather than investing in individual stocks, a number of exchange-traded funds (ETFs) fit the bill. Moreover, many of these funds have been strong performers this year, demonstrating the potential of the sector. For example, the NAVs of two funds detailed below, the db x-trackers MSCI Emerging Markets Healthcare TRN Index ETF (XMEH) and the EGShares Health Care GEMS ETF (HGEM), are up 21.4% and  14.0%, respectively, year to date.

db x-trackers MSCI Emerging Markets Healthcare TRN Index ETF (XMEH)

The db x-trackers MSCI Emerging Markets Healthcare TRN Index ETF tracks the performance of the companies included in the MSCI Emerging Market Index that are classified as Healthcare companies according to the Global Industry Classification Standard (GICS). This incorporates the industries of pharmaceuticals, healthcare facilities, healthcare distributors, managed healthcare, healthcare suppliers and healthcare services.

Pharmaceuticals dominate with a weighting of 60.7%. Country exposure is more diversified. Indian companies form the largest share of the index (29.0%), with South Africa (24.4%), China (13.6%), Brazil (9.4%) and South Korea (8.5%) also making a significant contribution. Companies from Hungary, Malaysia and Indonesia complete the portfolio. There are 21 holdings in total. Major holdings include Aspen Pharmacare, Life Health, Sun Pharmaceutical, Dr Reddy’s Laboratories and Celltrion.

The fund is listed on both the London Stock Exchange (Ticker: XMEH) and the Deutsche Börse Xetra (Ticker: XMKH) and comes with a total expense ratio of 0.65%.

EGShares Health Care GEMS ETF (HGEM)

The EGShares Health Care GEMS ETF invests in the constituents of the Dow Jones Emerging Markets Health Care Titans 30 Index. This index is created to represent 30 of the largest emerging market companies in the healthcare sector as defined by the Industry Classification Benchmark (ICB). Pharmaceuticals & biotechnology companies account for 66.5% of the index while healthcare equipment and services companies represent 33.5%.

The main country weights are India (31.4%), South Africa (25.5%), China (19.7%), Hungary (6.1%), and Thailand (4.9%), while Indonesia, Mexico, Russia, Malaysia and Chile are also represented. There are 30 holdings in total, the largest of which are Aspen Pharmacare, Sun Pharmaceutical, Mindray Medical, Dr Reddy’s Laboratories and Richter Gedeon.

The fund is listed on the NYSE Arca (Ticker: HGEM) and comes with a net expense ratio of 0.85%.

For investors looking for targeted exposure to the Chinese healthcare sector, the following ETF does the job:

db x-trackers CSI 300 Health Care Index ETF (3057)

The db x-trackers CSI 300 Health Care Index ETF tracks the performance of A shares comprising the CSI 300 healthcare sector, which is one of the 10 sectors constituting the parent CSI 300 Index The parent index measures the performance of A shares traded on the Shanghai Stock Exchange or the Shenzhen Stock Exchange. The index has 21 companies and is overwhelmingly dominated by pharmaceutical companies, with a 96.7% weight. Major holdings include Guangdong Kangmei Pharma, Yunnan Baiyao, Shan Dong Dong-E E-Jiao, Jiangsu Hengrui Medicine and TJ Tasly Pharm.

The fund is listed on the Hong Kong Stock Exchange (Ticker: 3057 HK) and comes with a total expense ratio of 0.50%. Despite the Hong Kong listing, the fund has UK Reporting Status and is registered for distribution across much of Europe.

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