Health-Care ETF Has Rosy Chart

05/23/2011 2:30 pm EST

Focus: ETFS

Benjamin Shepherd

Analyst, Breakthrough Tech Profits, Global Income Edge and Personal Finance

Health-care reform has proven anything but a death knell for this one-stop bet on medical stocks, writes Benjamin Shepherd of Personal Finance.

After a period of stasis following the passage of health-care reform legislation in March 2010, the health-care sector has finally achieved some positive momentum.

It’s about time. Health care has a lot to offer investors, from relatively stable earnings to attractive dividend yields. Meanwhile, valuations remain near all-time lows on a price/earnings basis, even as many health-care companies cut costs aggressively to maintain margins.

Sell-side researchers at many of the major brokerage houses have also changed their tune. Analysts initially bemoaned the cost pressures associated with health-care reform. Pharmaceutical companies, in particular, would likely suffer lower reimbursement rates on their drugs.

However, as analysts have come to understand the nuances of the Patient Protection and Affordable Care Act (PPACA), their focus has shifted to emerging opportunities.

For example, a larger patient pool should prove a net positive for many pharmaceutical outfits, while health insurers also stand to benefit from an upsurge in government-mandated premiums paid into their plans.

An uptick in merger and acquisition activity also should continue to push valuations higher in the pharmaceutical industry. Facing patent expirations and weak development pipelines, many large and midsize companies address these long-term challenges by acquiring smaller companies with promising drugs that are near approval—a strategy less risky and more cost-effective than relying solely on internal research and development.

Although acquirers may overpay for assets, thus far the majority of deals have featured reasonable valuations.

Over the long term, the health care sector should benefit from aging populations in the developed world and rising household incomes in emerging markets.

Low fertility rates and longer life expectancies mean that Europe’s population of people over 60 years old grows by roughly 2 million individuals with each passing year. In the US, the leading edge of the baby boomers—the roughly 77 million Americans born between 1946 and 1964—will enter retirement in 2011. As people grow older, they tend to consume more health-care products and services.

Meanwhile, the United Nations reports that hospital construction accelerated by 30% over the past five years in Africa and by more than 20% in South America. All of those new hospitals have to be equipped—a boon for medical-device manufacturers.

This confluence of developments pushed iShares S&P Global Health Care (IXJ) to a 52-week high last Thursday, a remarkable move after a lackluster 2010. [The exchange-traded fund has retreated 2% from that peak over the last two trading sessions—Editor.]

The IXJ's diversified portfolio features stocks from a wide range of industries, including insurance, benefit management, biotech, and pharmaceuticals.

Although US equities account for more than 60% of the ETF’s assets, almost two-thirds of the revenue generated by its portfolio holdings comes from international markets.

Looking for one-stop exposure to the near- and long-term growth trends in the health-care sector? Buy iShares S&P Global Health Care.

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