2023-07-14 08:35:11 ET
Summary
- IYH bets on stocks of companies engaged in the business of pharmaceutical and managed healthcare - two sectors that have relatively stable price growth.
- Healthcare expenditure holds up in times of deteriorating credit conditions and also when retail investors’ interest in the stock market reaches the floor.
- Over the long run (5 to 10 years), IYH generated strong price growth because most of the large-cap stocks in which it has invested delivered strong returns.
- Aging population is growing at a fast rate and about 50% of an average American's lifetime medical costs will occur while he/she is on Medicare.
~ by Snehasish Chaudhuri, MBA (Finance)
iShares U.S. Healthcare ETF (IYH) has invested heavily in stocks of companies engaged in the business of pharmaceutical and managed healthcare. During my multiple previous coverage, I found that as these two healthcare segments performed relatively better, IYH had been much more stable than other healthcare funds, especially ones which are concentrated in biotechnology and life sciences segments. I was bullish on IYH on my previous coverages and also expected a lower price volatility for this fund , as it was composed of mostly large-cap defensive stocks. However, I also pointed out that the fund entered into a temporary bearish rally during April 2022. Almost 15 months later, I would like to reassess the investability of this large-cap healthcare ETF.
Pharmaceutical and Healthcare Equipment Segments had Strong Growth Potentials
During a coverage almost 18 months back, I found that iShares U.S. Healthcare ETF is suitable only for long-term growth-seeking investors. Due to its low yield, income-seeking investors might not like this fund. As the average price return was good enough over the long run - 17.39% over the past 5 years, and 17.06% over the past 10 years - dividend yield could easily be overlooked by long-term investors. I was impressed with a relatively low share (around 10%) of biotechnology stocks in IYH's portfolio. I opined that biotechnology stocks should not be gambled upon because the possibility of broader market reciprocating the same was quite low. Moreover, I believed that in the post-pandemic scenario, healthcare equipment, pharmaceutical and managed healthcare segments possessed strong growth potentials.
IYH Had Been Consistent With its Investments in Pharmaceuticals & Managed Healthcare
During my last coverage more than a year back, I opined that IYH's stock selection was very balanced and well-diversified. Pharmaceutical and managed healthcare companies held half of its total investments. These two sectors were safe bets, as these sectors were not expected to remain bearish for a longer time. Healthcare equipment had historically been one of the most steady segments within the healthcare industry. However, around 25 percent of IYH's investments were in biotechnology and life science tools and services segments, which were not that productive between August 2021 and May 2022. Those segments had a tendency to stay bearish for almost a year in various past occasions, such was the case during the year 2016 and 2018.
IYH's Major Holdings Failed During 2023, But Recorded High growth Over Long-Run
IYH's top 50 investments hold more than 90 percent of its entire portfolio. However, almost 50 percent is invested in 12 large-cap pharmaceutical and managed healthcare businesses. This list includes large biopharmaceuticals like Johnson & Johnson ( JNJ ), Eli Lilly and Company ( LLY ), Merck & Co., Inc. ( MRK ), Bristol-Myers Squibb Company ( BMY ), Abbott Laboratories ( ABT ), AbbVie Inc. ( ABBV ), Pfizer Inc. ( PFE ) and Zoetis Inc. ( ZTS ); and managed healthcare firms such as Elevance Health, Inc. ( ELV ), The Cigna Group ( CI ), UnitedHealth Group Incorporated ( UNH ), and Centene Corporation ( CNC ). Investments were made in stocks of a large number of healthcare equipment, biotechnology, and life sciences tools & services businesses. However, the average investment on those stocks was almost equal to one percent.
Over the past five years, barring PFE and BMY, other ten stocks registered stable price growth in excess of 5.15%. However, during 2023, these stocks failed to generate impressive results. These stocks are more stable than stocks of other healthcare segments, however their returns are also low. Price performance of healthcare equipment stocks had really been impressive both in the short run as well as in the long run. During 2023, price growth of most stocks were positive, and over the past 5 years, that growth has been exceptionally good - most stocks grew by at least 100%. At the same time, biotechnology and life sciences stocks had a really poor 2023, although, over the past five years, their overall price performance was quite impressive.
Going Forward, Aging Demographics Will be a Boon for Overall Healthcare Industry
If demographics is destiny, then the healthcare sector is certainly destiny's favorite child. Healthcare expenditure is that aspect of economic spending which stays robust during economic slowdowns, and does not get drastically impacted like that happens to software demand or home buying. It holds up well in times of deteriorating credit conditions and particularly well when retail investor's interest in the stock market reaches the floor. It is a relatively stable sector over the long-run, especially when there is a storm in the equity market. If historical trends are any indication, then large cap healthcare stocks should be able to deliver an above-average growth rate for the next three to five years.
Approximately 11,000 baby boomers are turning 65 each and every day. By 2030, baby boomers will be over 65. Not only that, for the first time in U.S. history, older adults are projected to outnumber children under 18 years by 2034. About fifty percent of an average American's lifetime medical costs will occur while he/she is on Medicare, which means more healthcare spending. Better diets might be part of this trend, but a lot of it is happening because of pharmaceutical use and available medical procedures. Aging population of the developed world is growing at an enormous rate. Investing in stocks of pharmaceuticals, managed healthcare and healthcare equipment will thus be a smart strategy to adopt, especially in order to defeat the recessionary trend.
Investment Thesis
iShares U.S. Healthcare ETF possesses a large-cap (asset under management of $3.11 billion), well-diversified portfolio. Due to an extremely low turnover of only 3%, this fund provides confidence to its investors. Over the long run, IYH generated high price growth. Over the past five years, IYH's price rose by 47% , which is more than 8% CAGR. This was possible because most of the large-cap stocks in which this fund invested delivered strong returns over the past five years, and also over the past 10 years. IYH's almost static portfolio provided further impetus. Despite the fund's price hovering between $250 and $300 for almost two years, IYH persisted with its emphasis on the same stocks from pharmaceutical and managed healthcare segments.
Between 2016 and 2021, when the market conditions were substantially better, this fund delivered a total return of 15.8%. However, it has a very low yield of 1.15% and is trading almost at par with its net asset value. This should discourage income-seeking investors. However, for long-term growth seeking investors, IYH comes as a very good option. As the healthcare sector is on a path to recovery and is poised for growth, IYH's stable portfolio of diversified healthcare stocks is in the right position to take advantage of this growth. In the short run however, IYH will be a low-growth stable fund.
For further details see:
IYH: Focus On Pharmaceutical And Managed Healthcare Stocks Is Paying-Off