Chatting to advisers and investors every day, a common question I get asked is “where is the money going in ETF-land?” or “what type of ETF exposure is receiving the most amount of flows?”. I thought I would answer that question with a short post on the topic. And the answer – a lot of money is currently going into drugs (or more accurately global healthcare companies!).
Looking further at the numbers it is clear that recently global healthcare is indeed a stand out from a popularity perspective – in fact, July alone saw U.S Healthcare ETFs inflows surpass $1 billion in inflows (evident in the chart below).
The Healthcare sector so far in 2018.
The healthcare sector got off to a shaky start in 2018, with the majority of companies in the sector posting disappointing earnings in the first quarter of the calendar. Adding to this, political tensions rose with threats of lower drug prices sending the sector plunging very early on in the year.
This trend was reversed with more than 90% of healthcare companies exceeding earnings forecasts in the second quarter, beating every other sector. The sector also stood out for having the fewest downward revisions in operating margins, making it attractive to investors around the world. A few other positives that came out of the recent earnings season were attractive valuations in the sector, upward earnings revisions, share buybacks and policy tailwinds as the threat to lower pharmaceutical prices appeared to be fading, providing a more favourable regulatory back drop.
As a result, the market saw large pharmaceutical companies like Pfizer, Eli Lilly & Co and Merck & Co rally and subsequently hit 16 year highs.
So, what does this mean for the healthcare sector moving forward?
Traditionally, the healthcare sector has been viewed as a more defensive sector, that is, not as economically sensitive relative to others. As such, with trade tensions lingering and more people believing that the U.S. economy is moving into the late cycle phase, the risk is that overall growth may slow. As a result, investors with a “bearish” outlook may start to look for more defensive sectors, like healthcare, to invest in.
As an added level of interest in healthcare, an argument can be made that medical technology companies can tap into increased healthcare spending among ageing populations within emerging economies, providing another potential engine of growth for this sector.
How do I get exposure to global healthcare companies?
For starters, investors can already readily invest in one or more Australian-listed healthcare stocks, such as ResMed or CSL. One risk with this approach is that it can expose investors to undue country and stock-specific risk, given the highly competitive and dynamic nature of the global healthcare industry. Another simple to use and more diversified option is the BetaShares Global Healthcare ETF – Currency Hedged (ASX: DRUG). DRUG offers Australian investors an easy and transparent way to gain exposure to a portfolio of the largest global healthcare companies (excluding Australia) without taking undue stock-specific or exchange-rate risk, while also avoiding – as a fund domiciled in Australia – any added tax and administrative burdens that might otherwise arise from some alternative investment vehicles providing international exposure. In a single trade using DRUG, investor get access to global healthcare giants such as Roche, Bayer, GSK and more.
So, time for a dose of DRUG in your portfolio?