Healthcare ETFs set for period of sustained growth

Nov 1st, 2011 | By | Category: Equities

Healthcare ETFs set for sustained growth

Following last week’s launch of the NYSE-listed RBS Global Big Pharma ETN (DRGS), we take a look at the investment potential of healthcare and highlight a number of ETFs capitalising on the sector’s huge potential.

Healthcare ETFs set for period of sustained growth

Healthcare ETFs look set to benefit from multiple secular global trends, such as aging populations and increased emerging market expenditure.

The unveiling of this latest RBS ETN, which gives investors exposure to a basket of the world’s largest pharmaceutical firms, reflects a marked change in sentiment towards the sector.

Indeed, for much of the past decade, the healthcare sector – and especially ’big pharma’ – has been unloved and out of favour. However, investors are rightly showing renewed interest in the sector.

While the increased attention is due, in part, to the defensive characteristics of healthcare stocks – their stable revenues, strong balance sheets and healthy dividend yields provide sanctuary during times of heightened volatility – investors are also recognising the long-term potential the sector now offers.

A combination of factors – namely aging populations in developed Western countries, increasing healthcare expenditure in emerging markets, and an escalating global obesity epidemic – means that demand for healthcare is set for a period of sustained growth.

Moreover, regardless of how weak the global economy is, people around the world are spending money on healthcare. This is evidenced by the commitment of a number of cash-strapped European governments to maintain the level of health spending despite swingeing austerity cuts across other departments.

Renewed interest in healthcare fundamentals

Investors have shunned the healthcare sector of late, primarily because of uncertainty surrounding US healthcare reform and fears relating to the loss of patent protection.

The first issue, US health reform, is largely dealt with. Much of the reform has already passed into law and its impact is understood by investors; the consensus is that the reforms are positive to net neutral to the industry. The second issue, the threat from generic competition, is also well understood and fully discounted; though some $255bn in annual sales worth of drugs will go off patent between 2011 and 2016 (the so-called ‘patent cliff’), the transition to generic rivals has been well telegraphed and is sufficiently priced into stocks.

With these two overhangs cleared, investors can therefore once again turn their attention to the fundamentals – and the fundamentals are strong.

Richer, older and fatter

With more than two billion people worldwide likely to be aged 60 or over by 2050, healthcare is almost certain to be one of their top requirements. Evidence shows that elderly people overall use disproportionately more healthcare services than other age groups and that a minority account for a majority of healthcare expenditure. In the UK, people over the age of 85 use nine times more healthcare than people under the age of 65.

But not only are populations getting older, they’re also getting fatter! The World Health Organization (WHO) estimates two-thirds of the US adult population is overweight, with one-third considered obese. The US government estimates Americans spend $117 billion annually in costs associated with being overweight and obese, including direct medical and healthcare costs of $93 billion. And it’s not just an American problem: it is a global issue. The WHO projects the number of overweight adults to increase 44% from 2005 to 2015 to 2.3 billion globally, while the number of obese adults will increase 75% over the same period to 700 million.

Against this backdrop of an ageing and progressively overweight population faced with increasing incidence of chronic diseases – notably cardiovascular, cancer, respiratory and diabetes – global spending on health is expecting to rise substantially. In the US, for example, it is anticipated that healthcare spending will rise from 15% to 20% of GDP by 2015, creating a market worth $4 trillion.

Importantly, globalisation means that obesity is no longer a problem solely for affluent nations. The burden on chronic disease is also on the rise across the developing world. Moreover, as developing countries get rich they typically spend more on health regardless. So, with India, China, Brazil and other emerging markets all growing rapidly, we can expect significant increases in spending on health-related programmes.

All this, of course, bodes well for healthcare companies. As the sector best positioned to capitalise on the challenges posed by these demographic and socio-economic trends, it is likely to be rewarded with superior growth rates. Indeed, companies right across the sector – from medical equipment, to hospitals, home healthcare and nursing homes, to biotechnology, pharmaceuticals and life sciences – look ripe for growth.

For investors wishing to exploit this secular growth story, they might wish to consider the following ETFs:

STOXX Europe 600 Optimised Health Care Source ETF

Health Care S&P US Select Sector Source ETF

SPDR MSCI Europe Health Care ETF

Amundi ETF MSCI Europe Healthcare 

Lyxor ETF MSCI World Health Care

DB X-Tracker CSI 300 Health Care Index ETF

DB X-Tracker MSCI Emerging Markets Healthcare Index ETF

DB X-Tracker MSCI World Health Care Index ETF

DB X-Tracker Stoxx Europe 600 Health Care ETF

(the above are domiciled in Europe and registered for distribution in UK)


RBS Global Big Pharma ETN

PowerShares Dynamic Biotechnology & Genome Fund

PowerShares S&P SmallCap Health Care Fund

iShares NASDAQ Biotechnology ETF 

Market Vectors US Listed Pharmaceutical 25

(the above are domiciled and listed in the US)

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