IXJ - IXJ: Long-Term Buy On Global Healthcare Tailwinds

Summary

• iShares Global Healthcare ETF has beaten the S&P 500 over the past 5 years while having less volatility.
• The IXJ ETF is full of high-quality companies and is globally diversified, lowering the risk of being too focused in the United States.
• IXJ has a solid 1.24% dividend yield, which combined with its stability makes it a great option for retirees.
• Growing healthcare spending globally is a continued tailwind for IXJ as wealthy countries continue to increase spending.

Healthcare continues to grow in importance around the world, with the United States, Europe, and China all having aging populations. Spending continues to increase globally, and medical technology is allowing an improved quality of life. As you can see below, the iShares Global Healthcare ETF ( IXJ ) provides a strong way of getting healthcare exposure at a low price. The exchange-traded fund ("ETF") has beaten the S&P 500 Index (SP500) over the past 5 years, which is an impressive feat considering the strong performance over that period. IXJ also has a very reasonable management fee for such a largely diversified ETF at 0.40% per year. It further sports a solid 1.24% forward dividend yield, which is a bit below SPY's 1.63% forward yield.

However, you get a reduced volatility ETF, with only 0.66 Beta to the market. This lack of volatility will be essential for 2023, and it shows in the recent uptick in pharmaceutical stock prices. Below, you can see over the past year it has managed an impressive -1.33% return before dividends and a positive return with them. It has also seen a 25% increase in assets under management as investors continue to move out of the technology-weighted SPY to healthcare. This has increased in the past several months as economic data has continued to worsen and fears of recession in the next year have grown. Money will continue to flow to the safer areas, pushing prices up until the economic 'all clear' is given at some point in the next few years.

Investors continue to add to these areas as the revenue and earnings are extremely stable, and less impacted by the coming weak macroeconomic environment. Global PMIs are trending down, and consumers are being pinched by the global inflation of 202 and 2022. It is important to note that the ETF trades at a 20.88 price-earnings ratio, which is a premium to the market. The premium is explained by the high quality of the revenue and earnings, consisting mostly of large and mega-cap names. The reason being the average-weighted market cap of the ETF is a massive $191.1 Billion USD, one of the more mega-cap focused ETFs you can purchase. These companies continue to outperform small caps, which have been battered due to their weaker profit margins and less stable earnings outlooks in this high interest rate environment.

The top 10 constituents are comprised of household mega-cap pharmaceuticals, with many stable approved drugs and strong earnings growth. Some of those outside the top 10 include the fast-growing medical device space with names like Abbott ( ABT ), Medtronic ( MDT ), and DexCom ( DXCM ). Diabetes treatment devices, spinal surgery, and heart treatments are among the fastest-growing areas with strong innovation in the past 5 years. These companies are seeing significant growth, especially in the United States, and should see large growth outside the U.S. over the coming decade. This makes the ETF a strong choice for a long-term hold as the medical technology portion of the ETF will grow over time. The ETF is mostly American companies, with 72% of the ETF made of U.S.-listed companies. The amount of innovation coming out of the U.S. has led to a huge portion of the world's drug companies calling the U.S. home. The remainder is mostly focused in Western Europe and Japan, with those regions both with their own biotechnology cultures. This gives a full global selection of companies, without being so tied to the S&P 500 which may act as a drag on returns in the coming year. Investors continue to sell technology and consumer stocks, which will be more of a drag on the U.S. markets than elsewhere, allowing IXJ to outperform.

Healthcare spending has continued to increase in North America, with it now comprising a huge 16.32% of GDP. The $10318 per capita number was from 2019 and is likely even higher now that Covid-19 has shone a light on healthcare around the world. This is a large tailwind that will start to form, with China at just 5.35% of healthcare spending and growing quickly. Over the next 20 years, that number should double and create a huge growing market for healthcare companies. Globally the number has increased significantly since 2000 as well, with 9.83% up 1.2% from the 8.63% in 2000 and growing.

For 2023 - Stay Defensive

2023 will be another very uncertain year, with most investors trending towards the safer sectors until we have a better macro environment. Healthcare has a strong demographic tailwind globally, with most wealthy countries continuing to increase in age. IXJ deserves a spot in most retiree portfolios and also provides a great place to park cash even for younger investors. While other options like an utilities or financials global ETF are interesting, healthcare provides the best balance of valuation and growth for the long term. IXJ is the best option because of its impressive diversification, great liquidity, and global presence. While technology or consumer stocks have a part of any long-term portfolio, this is the time to be overweight the healthcare sector with iShares Global Healthcare ETF to protect capital above all else.

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