iShares S&P Global Health: How to Play Big Pharma

02/21/2018 5:00 am EST


John Persinos

Managing Editor, Personal Finance

iShares S&P Global Healthcare (IXJ) is an exchange-traded fund that seeks to track the S&P Global 1200 Health Care Sector Index, explains John Persinos, fund expert and editor of Personal Finance.

For investors, the vast health services sector is a relentless moneymaking machine, regardless of who controls Congress or occupies the White House.

People in developing and developed countries alike are aging, demanding rising levels of care. In developing nations, emerging middle classes are growing more affluent and embracing Western eating habits and lifestyles that boost the occurrence of illness and disease. As they get older, fatter and sicker, these people are clamoring for the expensive, high-tech medical care they see in America.

This global dynamic is a boon for IXJ’s holdings. Top holding Johnson & Johnson (JNJ) is a health care blue chip that should greatly benefit from the growing willingness of shoppers to pry open their wallets for everything from consumer goods to health care services and products.

IXJ’s portfolio is weighted to large caps that dominate their markets. Rounding out the top five holdings are Novartis (NVSEF), UnitedHealth Group (UNH), Pfizer (PFE), and Roche Holding (RHHVF).

Novartis, Pfizer and Roche are mammoth profit machines, with long histories of rich earnings growth and high yields. By virtue of their size and muscle, these Big Pharma plays are aggressively pursuing every avenue of growth in the pharmaceutical space. Their global portfolios include medicines and vaccines as well as many of the world’s best-known consumer health care products.

UnitedHealth Group offers health benefit plans for individuals and public and private employers. UNH’s services encompass pharmacy benefit management, benefit plan design and claims processing services. As the leading health plan provider in the U.S., UNH is poised to be the biggest winner of consolidation in its industry.

Pharmaceutical and health care stocks offer a solid investment proposition: robust dividends, double-digit capital appreciation, and defensive stability. These characteristics will only get stronger in 2018, as demographics, tax law, and government policy provide tailwinds.

America’s major health care companies are engaged in a flurry of merger and acquisition (M&A) activity. This activity will accelerate in 2018 as the tax overhaul signed in December pumps cash into the coffers of corporations.

The new tax law slashes the corporate tax rate to a flat 21% from the highest 35% rate. This windfall will fuel the consolidation already underway in the health sector.

The health care and drug industries also tend to be recession-proof and resistant to the ups and downs of the economic cycle. The bull market and the economic recovery are getting long in the tooth. IXJ offers “defensive growth.”

The health industry enjoys tremendous momentum. According to the U.S. Centers for Medicare and Medicaid Services, total health care spending in the U.S. should grow from roughly $3 trillion today to $4.8 trillion by 2021, an increase of about 60%.

This year, we’ll see the emergence of health care mega-caps that dominate their respective niches. IXJ’s portfolio is comprised of this breed of company.

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