FHLC - FHLC: A Stable Portfolio Of Healthcare Stocks Delivering Strong Returns

2023-07-09 09:06:20 ET

Summary

• FHLC possesses a large-cap, stable portfolio of diversified healthcare stocks, which enjoys a low expense ratio and strong price growth over the long run.
• Over the long-run, FHLC’s delivered double-digit returns. This was possible as most of the large-cap stocks in which FHLC invested delivered strong returns.
• FHLC has a very low yield and is trading almost at par with its net asset value.
• As the healthcare sector is poised for growth over the long-run, FHLC’s stable portfolio of diversified healthcare stocks should also generate high returns.

~ by Snehasish Chaudhuri, MBA (Finance)

Fidelity MSCI Health Care Index ETF ( FHLC ) has invested heavily in stocks of companies engaged in the business of biotechnology and healthcare equipment. During my last coverage in May, 2022, I found that as those two healthcare segments performed relatively better, FHLC had been much more stable than other healthcare funds, especially ones which are concentrated in pharmaceutical and life sciences segments. I also expected a lower price volatility for FHLC, as it was composed of mostly large cap defensive stocks. However, I also pointed out that the growth of these two healthcare segments was relatively poor in 2022. One year back, I expected the fund to trade within a range of $60 to $70. In reality, FHLC’s price ranged between $58 and $67.

FHLC Invests in Large-Cap Defensive Stocks and With a Long-Term Outlook

Fidelity MSCI Health Care Index ETF was launched and is managed by Fidelity Management & Research Company LLC. The fund is co-managed by BlackRock Fund Advisors. FHLC benchmarks itself against the MSCI USA IMI Health Care 25/50 Index (MSWNTR), and uses representative sampling techniques in order to create its portfolio. The portfolio consists mostly of large-cap defensive stocks. This ETF was formed on October 21, 2013, almost 10 years back and has a tendency of persisting with the same set of stocks.

In an earlier coverage during February, 2022, I mentioned that historically, FHLC had been one of the best performers, and one of those rare healthcare funds that helped investors hedge against the impact of covid-19 pandemic. Healthcare sector as a whole had seen a steep fall in March & April 2020, and then some of the stocks generated huge growth. Fortunately, FHLC suffered a minimal loss during this pandemic. I also noticed that FHLC has a very steady investment policy with a low turnover ratio. Its top investments were inducted at least close to five years ago. This also amplified FHLC’s long-term outlook.

Investments in Biotechnology Stocks Generated Strong Returns Over the Long-Run

FHLC invested in a large pool of biotechnology stocks like Regeneron Pharmaceuticals, Inc. ( REGN ), Amgen Inc. ( AMGN ), Vertex Pharmaceuticals Incorporated ( VRTX ), Illumina, Inc. ( ILMN ), Moderna, Inc. ( MRNA ), Humana Inc. ( HUM ), AbbVie Inc. ( ABBV ), Gilead Sciences, Inc. ( GILD ), Biogen Inc. ( BIIB ), Veeva Systems Inc. ( VEEV ), Seagen Inc. ( SGEN ), Alnylam Pharmaceuticals, Inc ( ALNY ), Horizon Therapeutics Public Limited Company ( HZNP ), Exact Sciences Corporation ( EXAS ), BioMarin Pharmaceutical Inc. ( BMRN ) and Incyte Corporation ( INCY ). Over the past 5 years, MRNA grew by 536 percent, HZNP by 507 percent, and WST recorded a price growth of 280 percent. Barring INCY, BMRN, BIIB, ILMN all other stocks generated positive price growth over the past 5 years, and that was also within a range of 25 to 175 percent. However, overall price growth of these stocks was poor in 2023.

Healthcare Equipment Stocks Generated Strong Returns in The Short-Run, Too

Almost equal number of large-cap healthcare equipment stocks such as Intuitive Surgical, Inc. ( ISRG ), Abbott Laboratories ( ABT ), Medtronic plc ( MDT ), Stryker Corporation ( SYK ), Boston Scientific Corporation ( BSX ), Becton, Dickinson and Company ( BDX ), Edwards Lifesciences Corporation ( EW ), DexCom, Inc. ( DXCM ), IDEXX Laboratories, Inc. ( IDXX ), ResMed Inc. ( RMD ), GE Healthcare Technologies Inc. ( GEHC ), Zimmer Biomet Holdings, Inc. ( ZBH ), STERIS plc ( STE ), Penumbra, Inc. ( PEN ) and Hologic, Inc. ( HOLX ) are included in the portfolio of Fidelity MSCI Health Care Index ETF. Performance of healthcare equipment stocks had really been impressive both in the short run as well as in the long run. During 2023, almost all stocks generated positive price growth, and over the past 5 years, growth has been enormous, prices of most stocks have at least doubled during this period.

FHLC’s Investments in Life Sciences Segment Also Delivered Strong Returns

When it comes to the life sciences tools and technology segment, FHLC invested in a mix of large-caps and small caps. This list included Agilent Technologies, Inc. ( A ), IQVIA Holdings Inc. ( IQV ), Charles River Laboratories International, Inc. ( CRL ) Mettler-Toledo International Inc. ( MTD ), Revvity, Inc. ( RVTY ), Waters Corporation ( WAT ), West Pharmaceutical Services, Inc. ( WST ), Avantor, Inc. ( AVTR ), Bio-Techne Corporation ( TECH ), Danaher Corporation ( DHR ), Thermo Fisher Scientific Inc. ( TMO ), and Bio-Rad Laboratories, Inc. ( BIO ). While only WST and IQV generated positive growth during this year, performance over the past 5 years were impressive. Barring MDT, all other stocks generated price CAGR in excess of 5.15 percent. WST, TECH, TMO, DHR, IQV, A and CRL grew by more than 12 percent CAGR.

FHLC Invested Mostly in Defensive Stocks in Pharmaceutical, Managed Healthcare

Other prominent investments were made in large-cap pharmaceutical giants like Johnson & Johnson ( JNJ ), Bristol-Myers Squibb Company ( BMY ), Eli Lilly and Company ( LLY ), Merck & Co., Inc. ( MRK ), Pfizer Inc. ( PFE ), and Zoetis Inc. ( ZTS ); and in managed healthcare firms like Centene Corporation ( CNC ), HCA Healthcare, Inc. ( HCA ), Elevance Health, Inc. ( ELV ), Universal Health Services, Inc. ( UHS ) UnitedHealth Group Incorporated ( UNH ) and Molina Healthcare, Inc. ( MOH ). Over the past five years, barring PFE and BMY, all other stocks registered stable price growth in excess of 5.15 percent. However, during 2023, these stocks failed to generate impressive results. Stocks from pharmaceutical and managed healthcare are much more stable than that of other segments, however their returns are also relatively lower.

Investment Thesis

Fidelity MSCI Health Care Index ETF possesses a large-cap (asset under management of $3.1 billion), stable portfolio of diversified healthcare stocks. Due to a very low turnover of only 4 percent, this fund also enjoys the benefit of a low expense ratio of 0.08 percent. The fund generated strong price growth over the long run. Over the past five years, FHLC’s price rose by 45 percent , which is an almost 8 percent CAGR. This was possible because most of the large-cap stocks in which FHLC invested delivered strong returns over the past five years, and FHLC was almost static with its portfolio. Despite the fund delivering poor growth during the past 18 months, FHLC persisted with its emphasis on stocks from biotechnology & healthcare equipment sectors.

Between 2016 and 2021, when the market conditions were substantially better, this fund delivered a total return of 14.43 percent. However, it has a very low yield of 1.33 percent and is trading almost at par with its net asset value. This may discourage income-seeking investors to invest in this diversified healthcare fund. However, for long-term growth seeking investors, Fidelity MSCI Health Care Index ETF comes as a very good option. As the healthcare sector is on a path to recovery and is poised for growth, FHLC’s stable portfolio of diversified healthcare stocks is in the right position to take advantage of this growth. In the short run however, I am not that optimistic.

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