Healthcare innovation ETF breaks out as medical robots, wearables and telemedicine lead fight against Covid-19

Jul 7th, 2020 | By | Category: Equities

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Companies providing innovative healthcare equipment and services have experienced breakaway stockmarket performance recently, with further gains expected as healthcare providers increasingly look to capitalize on advances in technology and science to deliver healthcare outcomes more effectively and efficiently amid the ongoing coronavirus pandemic.

Healthcare innovation ETFs

Healthcare innovators have outperformed the broader sector by more than 11% over recent months.

This is the view of Anthony Ginsberg, Founder and Managing Director of GinsGlobal Index Funds, who recently shared his thoughts on opportunities in the innovative healthcare space in a webcast entitled “The Future of Healthcare: How Innovation in Smart Technology and Life Science is Reshaping Healthcare” hosted by ETF Strategy in partnership with HANetf.

Ginsberg is the co-creator of the HAN-GINS Indxx Healthcare Innovation UCITS ETF (WELL) which provides exposure to firms operating within eight innovative healthcare industries: bioinformatics, bioengineering, genome sequencing, healthcare trackers, nanotechnology, neuroscience, robotics, and medical devices.

The fund tracks the Indxx Advanced Life Sciences & Smart Healthcare Thematic Index which currently includes 107 constituents, sourced from both developed and emerging markets, that derive at least half of their revenue from these innovative, high-growth industries.

The ETF, which comes with an expense ratio of 0.59%, is listed on the London Stock Exchange in US dollars (WELL LN) and pound sterling (WELP LN), on Xetra (W311 GY) and Borsa Italiana (WELL IM) in euros, and on SIX Swiss Exchange in Swiss francs (WELL SW).

According to Ginsberg, WELL offers a significantly different profile compared to traditional healthcare sector funds. In particular, the fund is less exposed to ‘Big Pharma’ stocks as these companies have moved to outsource their research and development to smaller specialist firms.

WELL also stands apart from biotechnology ETFs which may have as few as 30 holdings with concentrated risk in the largest constituents. By contrast, WELL seeks out high-growth segments beyond biotechnology and employs a single-issuer cap of 4.5% at each June rebalance.

This strategy has paid off this year with the fund notably outperforming the broader healthcare sector in recent months.

Following the stockmarket-wide sell-off in February and March, healthcare stocks experienced a sharp rebound as investors priced in potential profits arising from future Covid-19 treatments. From the market’s bottom on 23 March, the S&P 500 Health Care Index gained 36.1% to 27 April, outpacing the 28.8% rise for the S&P 500 over the same period.

However, as initial results from Covid-19 drug trials proved indecisive, political pressure on pharmaceutical companies to put patients before profit has grown and hospitals continue to operate below capacity in anticipation of a potential resurgence in cases, thus putting pressure on the sector’s traditional revenue streams such as elective surgeries, the momentum behind sector’s initial rally has petered out with the S&P 500 Health Care Index rising just 0.3% between 27 April and 3 July.

WELL, on the other hand, has continued to stride ahead, climbing a further 11.5%. It is now up 9.3% year-to-date, outpacing broad healthcare funds such as the iShares S&P 500 Health Care Sector UCITS ETF (IUHC LN) which returned 0.4% (see chart below).

Healthcare innovation ETFs performance covid-19

According to Ginsberg, the ETF has continued to make gains because investors have shifted their focus from short-term jubilation to long-term fundamentals.

What makes the ETF’s underlying holdings so attractive is that they effectively harness contemporary technologies, such as cloud computing, artificial intelligence (AI), and the internet of things, in order to capture long-term healthcare trends.

He notes that the healthcare AI market, already valued at over $50 billion, is expected to reach $150bn by 2026, according to a study conducted by Accenture. While AI applications within healthcare include reducing dosage error, analyzing clinical trials, connecting machines, detecting fraud, and assisting with administrative workflow, Accenture highlights robotic surgery and telemedicine as the two segments most likely to benefit from incorporating AI technologies.

Robotic-assisted procedures are already the gold standard in surgery with incisions being, on average, one-fifth the size of those made by a human hand. This remarkable precision leads to quicker recoveries and shorter hospital durations, helping to reduce hospital expenses by as much as half.

While the significant cost of investing in robotic equipment had initially acted as a barrier to adoption, Ginsberg notes that companies such as Intuitive Surgical, which manufactures and leases its Da Vinci robotic systems, are helping hospitals bridge that gap sooner.

Due to these dynamics, a study by Fortune Business Insights found that the global market for surgical robotics is expected to swell from $1.5bn in 2018 to over $6.8bn by 2026.

Fortune predicts similar growth rates for the telehealth market which stood at $50bn in 2018 but could reach over $260bn by 2026. Ginsberg thinks that number could be even higher as Covid-19 leads to a permanent behavioural shift in favour of remote screening.

Highlighting the effectiveness of telemedicine, Ginsberg notes that patients arriving at London’s Moorfields eye hospital now undergo an initial AI diagnostic that has been proven to provide superior predictive modeling compared to examination from an ophthalmologist.

Despite such impressive feats, Ginsberg believes telemedicine is still in its infancy. With US insurance companies recently moving to include telemedicine within their policies, Ginsberg forecasts a spike in demand that will drive further adoption and innovation for the segment.

Turning to healthcare trackers, Ginsberg points out that medical wearables extend beyond the Fitbit varieties that have become popular in the consumer discretionary market. From blood pressure monitors to biosensors, ECG trackers to emergency pendants, and pulse oximeters to pill dispensers, medical wearables are having a far-reaching effect that is directly helping to save patients’ lives. The segment is expected to enjoy a 40% compound annual growth rate (CAGR) over the next five years, reaching a market size above $87bn.

Biotechnology is still an important feature for the ETF which gains most of its exposure to the segment through investing in genetic sequencing firms. By quickly sequencing the genetic code of Covid-19, these companies were at the forefront of our initial understanding of the current pandemic.

The opportunities in genetic sequencing are further highlighted by how the cost of sequencing a human genome has fallen dramatically from over $100 million in 2001 to just $1,000 today. These reduced costs have made genetic sequencing a realistic avenue for people looking to obtain valuable medical information for future care. The industry has boomed and is expected to grow at a CAGR above 20% over the next four years. Biotech company Regeneron, WELL’s largest holding before the recent June rebalance, has soared 68.1% YTD.

When asked about how the upcoming US elections could impact WELL’s performance, Ginsberg said that the Democrats appear to be on course to retake the Presidency and retain Capitol Hill, while control of the Senate is likely to be hotly contested.

Ginsberg did concede that the Democrats are likely to block large M&A activity which, historically, has delivered pockets of share price growth, but notes that a Democrat victory could offer a tailwind due to the party’s progressives viewing health care as a basic human right.

The Democrats would likely seek to reinvigorate Obamacare by extending cover to the 40% of US citizens that are still uninsured or under-insured. Under such reforms, further pressure will be put on companies to find innovative solutions to keep costs low.

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