Thematic investing with ETFs: Healthtech

Sep 27th, 2017 | By | Category: Equities

This is the third in a series of five articles, each covering a different area of thematic investing using ETFs. The first two focused on Cybersecurity and Robotics & Automation, while in this article we look at how investors can take a view on the megatrend of healthtech and healthcare innovation through ETFs.

Themtatic investing using ETFs: Healthtech

How can investors prosper from developments in healthcare technology using ETFs?

Advances in technology are changing healthcare. From cell therapy to neuroscience, to big data and nanotechnology, the frontiers of healthcare and medicine are constantly being expanded.

The $4.2 billion poured into healthtech start-ups in 2016 shows the vast potential in the area for firms developing cutting-edge technology solutions.

But in a sector where a patent granted or refused can be worth billions, the high complexity, strict regulations and cultural diversity of different health care systems make picking individual winners difficult. Far better to gain exposure to the megatrend of technological innovation in healthcare through an ETF, which can give an investor a broader, smoother exposure to the segment.

European investors have two potential options to gain exposure to this megatrend through ETFs: the Source NASDAQ Biotech UCITS ETF (LON: SBIO) and the iShares Healthcare Innovation UCITS ETF (LON: HEAL).

SBIO tracks the NASDAQ Biotechnology Index, which comprises 160 biotechnology and pharmaceutical companies, as defined by the Industry Classification Benchmark from FTSE Russell, from the approximately 3,300 stocks listed on the tech-heavy NASDAQ Stock Market.

Stocks are subject to certain liquidity and size constraints, and the remaining components are weighted using a modified market-cap weighting system; the largest five constituents are capped at 8% and the remaining constituents are capped at 4%. The index is rebalanced quarterly and reviewed annually in December.

The country exposure breakdown shows that, as expected, the USA is the largest country by a distance (94%), with the other country exposures seen largely present due to companies with headquarters outside the USA for tax inversion reasons. The largest individual components of the index are Amgen, Celgene, Biogen and Gilead Sciences, all with a weight of approximately 8.3%.

The index has so far enjoyed an impressive 2017, returning 22.7% in the year to 26 September 2017.

SBIO is synthetically replicated using swaps. It was launched in November 2014 and has assets under management (AUM) of $406 million, with a total expense ratio (TER) of 0.40%. The ETF is listed on London Stock Exchange and SIX Swiss Exchange in dollars and Euronext Amsterdam in euros.

The other player in this space, the iShares Healthcare Innovation UCITS ETF (LON: HEAL), tracks the iSTOXX Factset Breakthrough Healthcare Index. This index includes companies in the STOXX Global Total Market Index that derive more than 50% of their revenue from operations that the research firm Factset defines as being within the breakthrough healthcare sector. Examples of activities falling within this sector include biological specimen storage, drug lead discovery, neurologic device manufacture and healthcare management software.

This makes HEAL a more focused play on the healthtech megatrend than SBIO, as SBIO has a significant portfolio weight given to large-cap pharma companies which, although they also participate in cutting-edge healthcare technology development, still derive a significant part of their revenues from legacy healthcare business activities and existing patents. Pure-play HEAL, on the other hand, only includes companies highly exposed to innovate healthcare.

HEAL is also more geographically diversified than SBIO as it features a global selection universe. The largest country exposure is still the USA with 46.6%, but South Korea (15.6%) and Japan (9.8%) are also well represented. The largest single components are Ionis Pharmaceuticals (2.9%), Biomerieux (2.1%) and CSPC Pharmaceuticals (2.0%).

HEAL has also registered notable performance recently, returning 22.5% in the year to 26 September 2017.

The ETF was launched in September 2016 and has AUM of $58m with a TER of 0.40%. It is listed on London Stock Exchange in dollars and pound sterling, on the SIX Swiss Exchange in dollars and on Borsa Italiana and Xetra in euros.

Investors looking for variations on this theme could also consider products covering the whole healthcare sector. European-domiciled heath care ETFs are available from providers SPDR ETF, Deutsche Asset Management, BlackRock, Lyxor, Amundi and Source.

US-based investors have plenty of choices to take advantage of this theme using ETFs, including, for example, the PowerShares Dynamic Biotechnology and Genome ETF (PBE), the VanEck Vectors Biotech ETF (BBH), the ARK Genomic Revolution Multi-Sector ETF (ARKG) and the  ALPS Medical Breakthroughs ETF (SBIO)

US Investors also have options for additional niche products based on the healthcare sector and how demographic trends are changing demand including the iShares US Medical Devices ETF (IHI), the Loncar Cancer Immunotherapy ETF (CNCR), the Janus Long Term Care ETF (OLD) and the Janus Obesity ETF (SLIM).

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