2023-04-23 09:00:00 ET
Summary
- The iShares U.S. Healthcare ETF invests based on the Russell 1000 Health Care RIC 22.5/45 Capped Index.
- With fears that FOMC actions will push the US into a recession no later than 2024, an allocation shift into defensive sectors is on some investors' radar.
- Along with reviewing IYH as a recession play, I looked at how HealthCare stocks performed during the 2008-09 GFC and 2020 COVID corrections.
- For investors like me, who either do not want to research individual stocks or have no time to do so properly, using a sector-wide ETF makes logical sense.
- In the Portfolio Strategy section, I list several reasons why I like this sector and give the IYH ETF a Strong Buy rating.
(This article was co-produced with Hoya Capital Real Estate )
Introduction
With fears that FOMC actions will push the US into a recession no later than 2024, an allocation shift into defensive sectors is on some investors' radar. Morningstar breaks sectors into three groups, with HealthCare, Consumer Defensive (or Staples), and Utilities in the Defensive group.
morningstar.com
Consumer Staples stocks performed poorly during the GFC and COVID, as some of those purchases were delayed as unemployment rose, or in the case of COVID, non-availability. Utilities held up well then as the FOMC lowered interest rates, which this sector is heavily influenced by. A recession might see that again, or at least slower/smaller increases. While COVID forced some delays due to hospital restrictions, those stocks still held up well as other health care expenses probably rose. Based on past results, I chose the HealthCare sector as my top pick as a recession-resistant sector. That leads me to suggest increasing one's allocation to HealthCare if they believe a recession is coming and then the iShares U.S. Healthcare ETF ( IYH ) as a good ETF to consider. In the Portfolio strategy section, I list several reasons why I like this sector and give the IYH ETF a Strong Buy rating.
Past Bear market results
While remember history doesn't always repeat itself, this is how the various sectors performed during the 2008-09 GFC and during the early stages of COVID.
PortfolioVisualizer.com GFC
HealthCare did indeed provide the best equity performance during this six month period but it was still down over 19%. The one I thought would be best as people have to eat and run a household, was Consumer Staples, but it placed sixth! Even high-risk Technology stocks did better than that sector.
That pattern repeated during the COVID correction, with Tech stocks having the best CAGR; HealthCare placed second, and Consumer Staples moving up to fourth.
PortfolioVisualizer.com COVID
iShares U.S. Healthcare ETF review
Seeking Alpha describes this ETF as:
iShares U.S. Healthcare ETF is managed by BlackRock Fund Advisors. The investment seeks to track the investment results of the Russell 1000 Health Care RIC 22.5/45 Capped Index composed of U.S. equities in the healthcare sector. IYH started in 2000.
Source: seekingalpha.com IYH
IYH has $3.3b in AUM and a somewhat high fee for a passive ETF of 39bps. The yield is only 1.13%.
Index review
FTSE Russell provides this description for the index:
The Russell 1000 Health Care RIC 22.5/45 Capped Index measures the performance of US large cap companies that are assigned to the Health Care Industry by the ICB sector classification framework. At the quarterly index reviews, all companies that have a weight greater than 4.5% in aggregate are no more than 45% of the index, and no individual company in the index has a weight greater than 22.5% of the index.
Source: content.ftserussell.com Index
Prior to September 20, 2021, the Fund’s Underlying Index was the Dow Jones U.S. Health Care Index , meaning most of IYH's history was under a different index. That index holds 18 fewer stocks and doesn't come with the caps the current index employs.
Holdings review
With 100% in the HealthCare sector, industry-level exposure becomes important.
Fidelity.com
While Pharmaceuticals is the largest allocation, the next three also have impressive levels, and the four basically define the ETF's portfolio. As we will see, most of the top positions have exposure to multiple HealthCare industries.
ishares.com; compiled by Author
The Top 20, out of 112, account for 71% of the portfolio. Here is a brief write-up on the top five stocks held, which comprise about 35% of the portfolio.
UnitedHealth Group Incorporated ( UNH ) operates as a diversified health care company in the United States. It operates through four segments: UnitedHealthcare, Optum Health, Optum Insight, and Optum Rx. The UnitedHealthcare segment offers consumer-oriented health benefit plans and services for national employers, public sector employers, mid-sized employers, small businesses, and individuals; health care coverage, and health and well-being services to individuals aged 50 and older addressing their needs; Medicaid plans, children’s health insurance and health care programs.
Source: seekingalpha.com UNH
Johnson & Johnson ( JNJ ) , together with its subsidiaries, researches, develops, manufactures, and sells various products in the healthcare field worldwide. Segments include: Consumer Health, Pharmaceutical, and MedTech.
Source: seekingalpha.com JNJ
Eli Lilly and Company ( LLY ) discovers, develops, and markets human pharmaceuticals worldwide. It offers Basaglar, Humalog, Humalog Mix 75/25, Humalog U-100, Humalog U-200, Humalog Mix 50/50, insulin lispro, insulin lispro protamine, insulin lispro mix 75/25, Humulin, Humulin 70/30, Humulin N, Humulin R, and Humulin U-500 for diabetes; and Jardiance, Trajenta, and Trulicity for type 2 diabetes.
Source: seekingalpha.com LLY
Merck & Co., Inc. ( MRK ) operates as a healthcare company worldwide. It operates through two segments, Pharmaceutical and Animal Health. The Pharmaceutical segment offers human health pharmaceutical products in the areas of oncology, hospital acute care, immunology, neuroscience, virology, cardiovascular, and diabetes, as well as vaccine products, such as preventive pediatric, adolescent, and adult vaccines. The Animal Health segment discovers, develops, manufactures, and markets veterinary pharmaceuticals, vaccines, and health management solutions and services, as well as digitally connected identification, traceability, and monitoring products.
Source: seekingalpha.com MRK
AbbVie Inc. ( ABBV ) discovers, develops, manufactures, and sells pharmaceuticals worldwide. The company offers Humira, a therapy administered as an injection for autoimmune, intestinal Behçet's diseases, and pyoderma gangrenosum; Skyrizi to treat moderate to severe plaque psoriasis, psoriatic disease, and Crohn’s disease; Rinvoq, a JAK inhibitor to treat rheumatoid and psoriatic arthritis, ankylosing spondylitis, atopic dermatitis, axial spondyloarthropathy, and ulcerative colitis; Imbruvica for the treatment of adult patients with blood cancers; and Venclexta/Venclyxto to treat hematological malignancies.
Source: seekingalpha.com ABBV
Distribution review
seekingalpha.com IYH DVDs
Payments are quarterly and show no straight line growth pattern. Over the past five/ten years, the CAGR has been approximately 10%/9%, earning IYH an "A-" grade from Seeking Alpha.
seekingalpha.com IYH scorecard
Valuation and Risk analysis
I thought the best means for this analysis was using IYH plus the three other sectors with the best long-term returns: IYH places 3rd on that measurement. In order of long-term performance:
- iShares U.S. Consumer Staples ETF ( IYK )
- iShares U.S. Basic Materials ETF ( IYM )
- iShares U.S. Real Estate ETF ( IYR )
First are some standard Valuation statistics.
Factor | IYH | IYK | IYM | IYR |
Price/Earnings | 22.3 | 23.3 | 12.6 | 25.7 |
Price/ Book Value | 4.6 | 4.2 | 2.7 | 2.3 |
Price/Sales | 2.4 | 1.1 | 1.7 | 5.3 |
Price/Cash Flow | 16.5 | 16.9 | 9.7 | 13.4 |
While today's ratios might indicate Materials as the most Value oriented, and if that was the case during GFC or COVID, neither period treated those investors well as Materials placed 8th during the GFC and dead last during COVID.
Now for some standard Risk measurements.
Factor | IYH | IYK | IYM | IYR |
Beta | .65 | .64 | 1.18 | .89 |
US Equity Market Correlation | .75 | .77 | .83 | .69 |
Concentration risk | 52 | 65 | 65 | 46 |
Standard Deviation | 13.8 | 13.1 | 22.8 | 20.4 |
Maximum Drawdown | -34.7% | -38.4% | -63.4% | -69.7% |
Positive Periods | 61% | 63% | 53% | 64% |
The selected risk factors favor IYH in most cases; never are they the worst ETF. Having a low Beta is desirable during any market correction.
Looking at just IYH, here is how their Top 10 holdings look to Seeking Alpha.
seekingalpha.com Ratings
While SA and Wall Street scores are Hold (orange) or Buy (green), only Pfizer ( PFE ) scored that high for Valuation, but overall, the IYH ETF scores well in the Seeking Alpha system.
seekingalpha.com IYH homepage
Portfolio strategy
Here are some reasons I think the investment case for HealthCare makes sense:
- Insurance : 91% of the US population has medical coverage; 19% under Medicare. If I read the data right, 71% of expenditures are already “paid for”, thus no need to avoid.
- Growth : CMS reports medical expenses grew 2.7% in 2021. The population on Medicare will grow from 56 million today to a projected 73.1 million by 2030.
- Market size: People age 65+ we’re 16% of the population in 2019; growing to 21.6% by 2040. In 2021, U.S. national health expenditure as a share of its gross domestic product ((GDP)) reached 18.3 percent; 4 of the 7 largest U.S. industries are health related.
- History: In the two market corrections discussed, HealthCare was the 1st and then 4th best performing sector.
Of course, the Federal Reserve Bank might pull off the elusive "soft landing" and the US avoids a recession, or at worst, has a mild one. In either case, overloading on defensive stocks probably would cost investors some return, hopefully in exchange for better sleep. Data from the summer 2000 onward shows that would not be a concern for HealthCare investors.
For further details see:
IYH: Even During A Recession, Folks Want To Stay Healthy (Rating Upgrade)