According to the World Bank, the average global life expectancy in 1970 was 71 – whereas by 2030 the expected global life expectancy will rise to 85. Due to population ageing, rising living standards and ongoing scientific advancements, spending on healthcare has increased strongly across the globe in recent decades and further strong growth is widely expected. As this note outlines, investors can easily gain diversified international exposure to this standout “secular growth” investment theme through exchange traded funds.
Healthcare is a classic “secular growth” industry
Irrespective of the global economic cycle, the health care sector is likely to enjoy relatively strong underlying growth in demand over coming years. As such, it represents a classic “secular growth” investment opportunity.
Indeed, spending on healthcare has increased relatively strongly across the globe in recent decades. According to OECD estimates, in the United States alone total (public and private) healthcare spending increased from 6.2% of GDP in 1970 to 16.9% by 2015.
Further solid growth in health care spending is expected. According to recent projections by the World Bank Group and the Institute for Health Metrics and Evaluation (IHME), spending on healthcare is expected to rise from 7.1% of global GDP in 2013 to 9.0% by 2040, representing just over a 25% increase in the health sector’s share of the global economy.
Again, in the United States alone, healthcare spending is projected to rise to 23% of GDP by 2040.
There are several reasons underpinning the strong growth in healthcare spending. For starters, healthcare is considered a “superior good”, so its share of household budgets has increased – and should continue to increase – along with rising living standards in both the developed and emerging markets.
At the same time, as the elderly tend to be more heavy users of healthcare services, population ageing in both developed and emerging markets in coming decades is likely to add to healthcare spending.
Last, but not least, ongoing scientific advancements from healthcare research should add to health spending demands by improving the sector’s ability to diagnose and treat a wide range of illnesses.
How to gain exposure to Healthcare?
Investors interested in gaining investment exposure to healthcare have a number of options at their disposal.
For starters, investors can already readily invest in one or more of a handful of Australian-listed healthcare stocks, such as ResMed or CSL. The problem with this approach, however, 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. Investing internationally can also expose investors to undesired currency risk and extra administrative and tax burdens.
With these challenges in mind, the BetaShares Global Healthcare ETF – Currency Hedged (ASX Code: DRUG) has been created to provide investors, within a single investment, diversified exposure to leading healthcare firms across the globe.
DRUG invests in around 60 of the world’s largest global healthcare firms outside of Australia, which at end-June 2016 had an average market capitalisation of $76 billion. That compares, for example, with market capitalisation of $52 billion and $12 billion for CSL and ResMed respectively
An important feature of DRUG is that it is currency hedged. That means the investment performance of DRUG will be more directly correlated with the performance of the global healthcare stocks in which it invests, and less so by the often erratic shifts in the Australian dollar exchange rate against other currencies.
And like all BetaShares Funds, DRUG is an Australian domiciled fund. Therefore, investors in DRUG do not need to fill out W-8 BEN forms, or risk any potential U.S. estate tax issues.
Investment performance of DRUG’s index
Given the rise in healthcare spending, it’s no surprise the healthcare sector has been a strong performer across global equity markets in recent years.
Since the recovery in global markets from the global financial crisis in early 2009, for example, the Index that DRUG aims to track has produced total annualised returns of 20.8% to end-June 2016, compared with 13.7% for the MSCI World Index.