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The popularity of ETFs has grown steadily since their introduction in 1993. Right now, investors are making full use of these vehicles in the healthcare sector.
A recent report from Barron’s maintains that since the beginning of 2014, healthcare has outpaced every other sector in the S&P 500, not to mention the broader stock market as a whole. The news source cites data from Thomson Reuters showing healthcare stocks have experienced gains of 15 percent so far during 2014, double the speed of the S&P 500 index. Meanwhile, Zacks Investment Research reported the healthcare sector has seen 19 percent returns.
The healthcare sector has been seeing major gains since 2010. In fact, a 2013 report from CNBC and Yahoo Finance showed that if you used the SPRD Health Care ETF as a measure, which includes Johnson & Johnson and Pfizer, healthcare companies have experienced gains of nearly 64 percent since March 23, 2010, eclipsing the 52 percent rise posted by the S&P 500.
A perfect storm
There are numerous reasons why the healthcare sector is performing so well. One vital factor is the Affordable Care Act. Since the passage of this legislation in 2010, healthcare stocks have seen significant gains and outperformed the broader market, according to CNN Money.
Since the legislation states that Americans who do not have health coverage will pay a penalty, it has resulted in millions of new customers for insurance companies. CNN Money illustrated that insurers such as UnitedHealth, Cigna and Aetna have all seen gains of approximately 100 percent since the Affordable Care Act was passed.
The legislation has also been a boon to hospitals.
“Hospitals currently get stuck paying for a lot of uninsured patients when they come to the emergency room,” Charles Sizemore, chief investment officer at Sizemore Capital Management, told CNN Money. However, the increase in insured Americans is set to improve hospital revenues and reduce debt burdens.
In addition to new legislation, the changing demographics of the US are contributing to the popularity of healthcare ETFs. Baby boomers, or individuals born between the years 1946 and 1964, represent approximately one-quarter of the US population, according to the Population Reference Bureau. More importantly, as this generation continues to age, it will result in much more spending in the healthcare sector, from prescription drugs to hospital care.
“The baby boomers began turning 65 in 2011 and are now driving growth at the older ages of the population,” stated a report from the US Census Bureau titled “The Baby Boom Cohort in the United States: 2012 to 2060”. “By 2029, when all of the baby boomers will be 65 years and over, more than 20 percent of the total US population will be over the age of 65.”
This isn’t a uniquely American issue, either. The United Nations recently reported that the number of people aged 60 years or more across the globe will increase from 841 million in 2013 to more than 2 billion by 2050.
Aging translates to growing reliance on healthcare services, something reflected in the current growth of this sector.
Taking advantage of the trend with ETFs
First and foremeost, ETFs are designed to allow investors exposure to specific market sectors at a relatively low cost. ETFs are often less costly than active mutjual funds while still giving invetors the chance to access hundreds or even thousands of stocks.
Simplicity is yet another reason many investors are drawn to ETFs. While buying and selling individual healthcare stocks can be burdensome and time-consuming, ETFs allow you to increase your market share quickly and easily without having to worry about individually calibrating your portfolio.
ETFs also feature tax advantages investors in the healthcare sector can utilize. Securities law allows ETFs to buy and sell to track the index without racking up investment taxes for the holder of the security. In short, if investors have taxable holdings, investing through an ETF can be very beneficial.
Selecting a Healthcare ETF
Investors will likely want to see which healthcare ETFs boast the strongest performances. Health Care Select SPDR (ARCA:XLV) and Vanguard Health Care ETF (ARCA:VHT), for instance, XLV and VHT have both seen gains of 15 percent or more since the beginning of 2014, as well as increases of 27 percent and 26.7 percent, respectively, over the past 12 months.
Meanwhile, many experts agree that pharmaceutical ETFs, such as iShares US Pharmaceuticals ETF (ARCA:IHE) and Market Vectors Pharmaceutical ETF (ARCA:PPH), offer investors lucrative exposure while minimizing the volatility seen with other market sectors.
Weighing the risks
One important factor to keep in mind is how healthcare companies have spread overseas in past years. Large pharmaceutical companies with global operations and healthcare organizations looking to acquire foreign companies have opened themselves up to foreign economic conditions, changes in US currency value and more stringent laws put in place by the US government targeting tax evasion.
Additionally, the healthcare sector as a whole faces more instances of regulatory changes and new legislation when compared to other industries.