2023-08-11 14:29:07 ET
Summary
- Invesco S&P 500® Equal Weight Health Care ETF has not seen any dilution or appreciation in price since its share split a month ago.
- RYH ETF has a good long-term performance record, generating an average total return of 10.14% over the past five years.
- Healthcare equipment providers have been the best performing stocks in RYH's portfolio, while the healthcare sector tends to outperform during uncertain economic times.
~ by Snehasish Chaudhuri, MBA (Finance).
When I covered Invesco S&P 500® Equal Weight Health Care ETF ( RYH ) almost 15 months ago, I found this well-diversified equal weightage healthcare exchange-traded fund, or ETF, was generating strong and steady growth, which was much better than other Invesco healthcare ETFs. Historically, the fund generated an average return in the range of 13 percent to 23 percent. I also found that due to its equal-weight allocation, RYH's returns were less volatile, and less susceptible to the price performance of a few stocks.
During my last coverage, I commented that RYH's future growth prospects were dependent on the worldwide demand for healthcare products and services, which was anyway expected to increase with time. I was bullish about this fund 15 months back then, and would now like to reassess the yield & growth potential of RYH under current market conditions.
After a Month Since The Share Split, There Hasn't Been Dilution Or Appreciation So Far
During Mid-April, 2022, Invesco S&P 500 Equal Weight Health Care ETF was trading around $300. The price stayed almost at the same level for the next 15 months; and then there was a 1:10 share split effective July 14, 2023. Since the split, the fund is trading around $30, thus effectively having no dilution or appreciation.
The fund has an asset under management ("AUM") of almost $1 billion, and a moderate expense ratio of 0.4 percent. Turnover ratio is also moderate at 22 percent. It had an extremely low yield of 0.6 percent, but it consistently offered quarterly pay-outs. RYH is currently trading at an average price to earnings ("P/E") ratio of 21.93 and at a marginal discount to its net asset value.
Despite No Return Over The Past 15 Months, RYH's Long-Term Performance Was Good
During April 2022, 71.5 percent of its assets were invested in 47 stocks that belonged to 3 segments - life sciences tools & services, healthcare equipment manufacturers & suppliers and healthcare service providers. 18 biotechnology and pharmaceutical stocks accounted for another 26.7 percent. This time, the composition remains more or less the same. As there has not been much price movements and yield has been marginal, total return was also negligible.
However, over the past five years, RYH was able to generate an annual average total return of 10.14 percent. The fund was launched during November 2006, at a price around $50, and after 16.5 years it was trading at 6x. Split adjusted value still revolves around $300. We can conclude that Invesco S&P 500 Equal Weight Health Care ETF was successful in generating value over the long run.
Stocks of Healthcare Equipment Providers Were The Best Performers For The Last Few Quarters
Although 67 stocks of RYH's portfolio are equally weighted, i.e., 1.45 percent of its assets are invested in each such stock. But, due to price movements, generally the proportion of holdings becomes much higher than this on some stocks. Those stocks surely are the best performers since the last portfolio reshuffling. In this case, the list mostly includes stocks of healthcare equipment manufacturers and distributors such as Edwards Lifesciences Corporation (EW), DexCom, Inc. (DXCM), Boston Scientific Corporation (BSX), Intuitive Surgical, Inc. (ISRG), Cardinal Health, Inc. (CAH), AmerisourceBergen Corporation (ABC), McKesson Corporation (MCK), STERIS plc (STE). Nonetheless, to mention that this is the highest return generating healthcare segment during the entire pandemic period and bearish period afterwards.
Stocks of 3 healthcare service providers namely HCA Healthcare Inc (HCA), Universal Health Services, Inc. (UHS), DaVita Inc. (DVA) and another three biopharmaceutical stocks namely Eli Lilly and Company (LLY), Biogen Inc. (BIIB) and Vertex Pharmaceuticals Incorporated (VRTX) also have a proportion of investment in excess of 1.65 percent. Bio-Techne Corporation (TECH), a stock belonging to life sciences tools & services, also features among top investments of S&P 500 Equal Weight Health Care ETF at present.
During the past 5 years, all healthcare equipment stocks recorded very high price growth between 50 to 250 percent. During the past one year, barring EW and STE, all other stocks grew in excess of 20 percent. In my opinion, RYH made the right decision by being overweight on stocks belonging to healthcare equipment manufacturers & suppliers and healthcare providers & healthcare services.
Healthcare Sector Relatively Outperforms During Doubtful Economic Outlook
It's true that equity markets suffer from uncertainty. But we don't usually face the dilemma that we are facing now, as historically reliable indicators keep on forecasting economic outcomes in such an extreme range. Healthcare is one sector that relatively outperforms the broader market or other sectors during such an economic uncertainty. It has been observed in the past that the market shifts to investing in healthcare stocks, when it faces poor or doubtful economic outlook.
This sector is also one of the best performers over a long period of time within the S&P 500 (SP500). The equal weighting further avoids any unwanted volatility arising out of dominance of few large-cap stocks. Healthcare sector funds thus become a good option for long-term investors.
Investment Thesis
Invesco S&P 500 Equal Weight Health Care ETF is a well-diversified equal weightage healthcare ETF that generates strong and steady price growth over the long run. Due to its equal-weight allocation, RYH's returns were less volatile, and less susceptible to the price performance of a few stocks. This fund also has some positives with respect to its considerably high allocation in stocks from companies belonging to healthcare equipment manufacturers & suppliers and healthcare providers & healthcare services. Over the past five years, RYH's current investments in these sectors delivered strong returns. Even during the past one year, despite RYH having almost no growth, investments in healthcare equipment manufacturers delivered strong returns.
However, the fund has been trading almost at the same price zone for approximately the past two years. A 1:10 share split came into effect on July 14th this year. This share split is expected to make RYH's shares affordable in the market. However, after a month since the share-split, there hasn't been any major dilution or appreciation in the fund's price so far. Probably the economic uncertainty is preventing this fund from trading at a significant premium.
Still, I am very much hopeful about the growth potential of this fund, as the healthcare sector looks uniquely positioned to generate relatively strong returns either in a recessionary environment or in a growing economic scenario. Income-seeking investors, however, should stay away from investing in Invesco S&P 500 Equal Weight Health Care ETF, due to such a low yield.
For further details see:
RYH: Share Split May Lead To Price Growth For This Healthcare ETF