September 11, 2023
Healthcare ETF Investing 101
The healthcare sector holds a significant place in the global economy, and its importance has been particularly highlighted in recent times. The sector is known for its resilience and capacity to weather various market conditions, making it a potentially reliable part of any long-term investment strategy.
Though it's true that specific events like the COVID-19 pandemic can generate temporary booms in certain healthcare companies, the true strength of this sector lies in its fundamental characteristics rather than fleeting trends. Its inherent stability and growth potential are derived from the following aspects:
- Secular tailwinds from a steadily aging population, coupled with increasing spending on healthcare services and products.
- Lower historical volatility and drawdowns during turbulent market conditions thanks to the industry's essential nature.
To sum up, the healthcare sector's enduring structural trends relative to other sectors make it a compelling option for investors. It's this unique blend of growth and resilience that underpins the potential for long-term investment success in the healthcare sector. Here's all you need to know about investing in the healthcare sector.
Secular tailwinds at play
The healthcare sector presents a fascinating and compelling investment narrative, much of which is anchored in key global trends. There are two major forces at play that are poised to shape the future of healthcare and its demand – the aging global population and increased healthcare spending.
Let's talk about aging first. It's undeniable that our world's demographics are shifting. Older populations are growing significantly, which naturally boosts the need for healthcare services and products.
This aging population wave will inevitably place higher demand on the healthcare sector, resulting in more robust growth over time. According to the United Nations Population Division, this trend shows no signs of slowing down and is predicted to continue for the coming decades.
(RHS) Source: United Nations – Population Division
Beyond the growing population of older adults, there's another critical factor supporting the healthcare sector – the steady rise in healthcare spending as a proportion of gross domestic product (GDP).
Data from the Organization for Economic Co-operation and Development (OECD) shows a substantial uptick in health spending in 2020, illustrating a sharp upward trend. This increasing expenditure drives demand in the healthcare sector, making it a fertile ground for investment.
(LHS) Source: OECD Health Statistics 2021
The interplay between two factors – an aging population and rising healthcare spending – provides the healthcare sector with a strong and sustained growth engine. As an investor, this combination of demographic, economic, and technological drivers could translate into substantial long-term growth potential in the healthcare sector.
Resilience in the face of market turbulence
Healthcare sector stocks also hold a unique appeal for risk-averse investors, especially during volatile market conditions. Historically, they have offered an inherent defensive quality that stems from a few essential characteristics.
On average, healthcare stocks tend to exhibit a lower-than-average beta, which makes them less volatile and more resilient during market turbulence. Beta measures a stock's volatility or sensitivity compared to the overall market movements. The lower a stock's beta, the less it tends to be affected by broad market swings.
The demand for healthcare products and services is considered 'inelastic', meaning it remains relatively stable regardless of economic cycles. This is due to the essential nature of healthcare – people need medical services and products irrespective of the economic climate. This constancy of demand lends a steadiness to healthcare stocks, even during economic downturns.
Finally, healthcare companies often maintain strong balance sheets and generate consistent cash flows, distinguishing them from more cyclical sectors like technology or consumer discretionary. This financial stability contributes to their resilience and defensive attributes.
We can see these variables at play in the chart below, which highlights the relatively lower drawdowns incurred by healthcare sector stocks during numerous notable periods of market crisis.
| Sector | 11/1/2007 - 2/28/2009 | 6/1/2015 - 2/29/2016 | 10/1/2018 - 12/31/2018 | 1/1/2020 - 3/31/2020 |
|---|---|---|---|---|
| Health Care | -24.95 | -12.06 | -9.23 | -10.81 |
| Consumer Staples | -22.44 | 3.12 | -6.40 | -12.06 |
| Utilities | -28.85 | -2.41 | 0.91 | -12.72 |
| Communication Services | -30.26 | -0.94 | -6.39 | -17.01 |
| Energy | -30.33 | -22.62 | -20.68 | -43.00 |
| Information Technology | -42.77 | -8.52 | -17.75 | -12.95 |
| Consumer Discretionary | -43.94 | -9.63 | -14.66 | -21.37 |
| Materials | -43.09 | -22.24 | -13.03 | -24.02 |
| Industrials | -47.51 | -9.65 | -16.31 | -25.22 |
| Real Estate | -54.48 | -6.42 | -4.65 | -22.50 |
| Financials | -58.50 | -17.80 | -13.15 | -30.16 |
| MSCI World | -41.23 | -11.39 | -13.14 | -20.10 |
Source: Morningstar Direct. Based on MSCI World Sector Indices. Performance in local currency. Periods where the MSCI World Index was down 10% or more.
As a further example, consider the significant market crash induced by the COVID-19 pandemic in March 2020. While the MSCI World Index dropped by 20.1%, and the energy and financial sectors fell by an even steeper 43% and 30.2% respectively, the healthcare sector proved its mettle by dropping just 10.8%. It was the least impacted among all 11 sectors, underscoring the sector's defensive nature.
Invest in the healthcare sector with CI GAM ETF
Navigating healthcare investments can be complex and time-consuming. The individual stock selection approach, while rewarding for some, comes with the potential for idiosyncratic risk, costs in trading commissions, and the considerable time needed for diligent research.
An alternative and efficient method of investing in this sector is through Exchange Traded Funds (ETFs). CI GAM offers a diverse range of healthcare-focused ETFs that cater to various investment strategies and investor needs. Let's take a closer look:
| Fund | Ticker | Mgmt. Fee |
|---|---|---|
| CI Health Care Giants Covered Call ETF (Unhedged) | FHI.B | 0.65% |
| CI Health Care Giants Covered Call ETF (CAD hedged) | FHI | |
| CI Health Care Giants Covered Call ETF (USD hedged) | FHI.U | |
| CI Global Healthcare Leaders Index ETF | CHCL.B | 0.35% |
| CI Bio-Revolution ETF | CDNA | 0.40% |
- CI Health Care Giants Covered Call ETFs (Tickers: FHI.B, FHI, FHI.U): For investors seeking higher yields, our Covered Call ETFs serve as a compelling alternative to traditional income-generating assets such as dividend stocks or corporate bonds. These ETFs write options on 25% of the portfolio's holdings, balancing the potential for upside return with options premiums that can offset losses during bear or sideways trading markets.
- CI Global Healthcare Leaders Index ETF (Ticker: CHCL.B): For passive, long-term investors aiming to implement a sector rotation strategy or looking to tilt towards healthcare, CHCL.B offers a one-ticker exposure to a global portfolio of liquid, large-cap healthcare stocks. It alleviates the need for investors to manually select and rebalance holdings.
- CI Bio-Revolution ETF (Ticker: CDNA): For those willing to take on greater risk in exchange for higher growth potential, CDNA provides exposure to the fast-evolving biotechnology and genomics industry. Notably, compared to other thematic ETFs of its class, CDNA offers a lower expense ratio.
CI GAM's suite of professionally managed ETFs combines competitive fees, diversified holdings, and innovative strategies to meet varied investment objectives and risk tolerance levels. If you're bullish on the healthcare sector, we have an ETF to suit your needs. Learn more on our ETF page today.
About the Author
Jaron Liu is a Director of ETF Strategy at CI GAM and is responsible for growing the ETF business by setting and executing the ETF sales strategy as well as supporting the ETF sales team. Prior to joining CI GAM, Jaron worked as an analyst within product management for one of the largest global asset managers where he focused on ETFs. Jaron graduated from the University of Waterloo with a degree in Honours Economics and is a CFA charter holder.
IMPORTANT DISCLAIMERS
Commissions, management fees and expenses all may be associated with an investment in exchange-traded funds (ETFs). You will usually pay brokerage fees to your dealer if you purchase or sell units of an ETF on recognized Canadian exchanges. If the units are purchased or sold on these Canadian exchanges, investors may pay more than the current net asset value when buying units of the ETF and may receive less than the current net asset value when selling them. Please read the prospectus before investing. Important information about an exchange-traded fund is contained in its prospectus. ETFs are not guaranteed; their values change frequently, and past performance may not be repeated.
This document is provided as a general source of information and should not be considered personal, legal, accounting, tax or investment advice, or construed as an endorsement or recommendation of any entity or security discussed. Every effort has been made to ensure that the material contained in this document is accurate at the time of publication. Market conditions may change which may impact the information contained in this document. All charts and illustrations in this document are for illustrative purposes only. They are not intended to predict or project investment results. Individuals should seek the advice of professionals, as appropriate, regarding any particular investment. Investors should consult their professional advisors prior to implementing any changes to their investment strategies.
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