An ETF for Global Healthcare

09/18/2017 2:54 am EST

Focus: HEALTHCARE

John Persinos

Managing Editor, Personal Finance

One axiom of stock investing is to find well-run companies that provide products and services everyone will need into the foreseeable future. Few necessities are as vital as health care, asserts John Persinos, editor of Personal Finance.


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Add an aging population and expanded government insurance to the equation and iShares S&P Global Healthcare makes a solid long-term bet in an otherwise risky broader stock market.

The global health care sector is vast and booming, as people around the world get older and sicker. In emerging markets, the rise of newly affluent middle classes also is fueling demand for medical services and drug treatments.

Health care growth is especially pronounced in the United States. According to a recent report, Americans spend $9,523 per person a year on medical expenses, by far the most among developed countries. Annual spending in the U.S. on health services now exceeds $3 trillion a year.


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Think of this spending as the medical-industrial complex, just as formidable as the partnership between the Pentagon and defense contractors that produces planes, tanks and bombs.

One of the surest ways to get rich is to tap into an unstoppable trend that’s largely immune to economic cycles. That’s another reason we’re bullish on the health services sector.

The iShares S&P Global Healthcare ETF (IXJ) is the benchmark exchange-traded fund for the international health care sector. The fund is weighted toward large-cap, blue-chip global companies in diverse health fields including insurance plans, pharmaceuticals, medical devices, and consumer products.

IXJ is comprised of the world’s most respected, best-managed health industry players. The fund’s top holding is Johnson & Johnson (JNJ), at 8% of assets. With a market cap of $358.7 billion, Johnson & Johnson makes medical devices and well-known over-the-counter drugs.

The company’s wide roster of products for a global customer base makes it a de facto health sector “mutual fund” in its own right. JNJ also happens to be a member of the Growth Portfolio.

IXJ’s second-biggest holding is Novartis (NVSEF), at 5% of assets. Switzerland-based Novartis is taking aggressive actions to find new cancer treatments, with programs that are in the vanguard of the latest fields of research.

Another compelling IXJ holding is health insurance provider UnitedHealth Group (UNH), at 4.1% of assets. Currently the market leader in the U.S., UnitedHealth Group offers health benefit plans for individuals and public and private employers of all sizes. Among the company’s diversified portfolio of health insurance and delivery products are pharmacy benefit management, benefit plan design and claims processing services.

Existing health care laws and regulations enforce mandates and incentives to keep prices low, which is good news for UNH.

The company’s cost-containment measures appear to be bearing fruit through an improving “medical care ratio,” the money it spends to process and pay medical claims compared to the insurance premiums it generates.

With strong balance sheets, generally optimistic guidance for the rest of 2017, and growing demand for their crucial products and services, IXJ’s holdings should weather the equity market downturn that’s likely to unfold this year.

The failure of Trumpcare in Congress is another factor in the health sector’s favor. Love it or hate it, Obamacare has expanded coverage to about 32 million Americans. That equates to millions of new customers for IXJ’s holdings.

Another tailwind is the resurgence of emerging markets, where rising middle classes increasingly demand health care on a par with America’s.

Year to date, IXJ has generated a total return of nearly 17%. We expect further market-beating returns in 2017 and beyond even if the wider economy slows.

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