FHLC - FHLC: Long-Term Growth And Stability Make Healthcare A Low-Volatility Bet

2023-07-10 15:54:24 ET

Summary

• The healthcare industry's potential for long-term growth and stability could give FHLC a silver lining as the market trajectory remains somewhat uncertain.
• Despite underperforming during bull markets, FHLC has shown resilience during economic downturns, giving investors the option to trade some momentum for greater consistency in this ETF.
• This ETF's robust fundamentals and strong focus on leading healthcare names could make it a prime option for those with a longer-term outlook and lower risk tolerance.

Healthcare has historically been renowned for its stable returns even during the most unforgiving market conditions. Such stability is a result of robust demand within this industry, as individuals don’t tend to consider the state of the economy when addressing health concerns. Though the Fear and Greed Index is shifting right and growth stocks are firing back up, I don’t think the forecast is completely clear for United States investors. For both beginners and younger investors in particular, I believe now would be an appropriate time to consider healthcare securities. I rate the Fidelity MSCI Health Care Index ETF ( FHLC ) a Buy.

Strategy and Holdings Analysis

FHCL tracks the MSCI USA IMI Health Care 25/50 Index and uses a representative sampling technique. This ETF’s holdings are weighted by market capitalization. The underlying index must allocate at least 80% of its assets in stocks with a market capitalization of at least $10 billion. The other 20% can then go towards stocks that do not fit this requirement. FHLC holds a variety of small to large-cap institutions.

This ETF consists of healthcare companies that are headquartered exclusively in the United States. FHLC houses over 400 stocks, the top 10 of which comprise just under half of the entire fund.

The top three holdings in this ETF are UnitedHealth Group ( UNH ), Johnson & Johnson ( JNJ ), and Eli Lilly ( LLY ), which altogether account for just over 20% of FHLC. I believe such holdings provide the ETF with a strong foundation as they’re recognized for long-standing profitability and growth. Despite this aspect and the stability it may provide, investors might still want to consider their willingness to put the majority of FHLC’s performance up to these three market leaders.

ETF Metrics: A low-risk, slow-moving asset

This ETF’s momentum is quite mediocre compared to the broader market, as seen below.

FHLC’s risk is also relatively low, with no single metric appearing in red or generating any major cautionary notes. This is a rare sight for me, as I’ve mainly written about technology ETFs with high standard deviations and annualized volatilities.

As seen in the charts below, this ETF appears quite sluggish against the market with a short to medium-term outlook.

The healthcare sector’s inability to hitch onto bull markets clashes with its ability to survive bear markets. Investors might want to weigh both aspects when considering this ETF, and fully understand the cost of momentum for the reward of stability. When looking back further, the gap between FHLC and the market gradually shrinks, showing that this ETF is likely one for the long run.

Notable ETF strength: hedging economic downturn

When the economy slows at the hands of high inflation and interest rate hikes , healthcare securities like FHLC often bear a lesser brunt. As seen below, FHLC’s decline during the COVID-induced recession in 2020 was less severe than that of the broader market.

This ETF’s October lows also didn’t reach the same depths as the S&P, and FHLC maintained a decently wide gap during the last quarter of 2022 when the Federal Reserve become especially hawkish .

This macroeconomic shielding stems from this sector’s relatively inelastic demand, meaning most consumers still pay for medical care even when their spending power is limited. Furthermore, the United States government is a primary contributor to healthcare services and projects, giving this industry federal backing at some level.

Notable ETF weakness: missing the benefits of economic recovery

Healthcare’s inelastic demand can backfire during a bull market when securities like FHLC don’t acquire the same velocity as securities in technology and financials. This ETF significantly underperformed the S&P for the better part of 2021, which some investors deem the last true bull market.

Additionally, during H1 2023 when technology and growth assets prevailed, FHLC didn’t match this momentum.

Conclusion

FHLC may be a relatively safe option going into the second half of the year as many investors question the sustainability of the growth stock rally that ensued in the first half. Investors, particularly those with a longer-term outlook and lower risk tolerance, might want to consider healthcare securities in the coming periods. Therefore, I rate FHLC a Buy.

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