Health care has been on the minds of everyone since COVID-19 emerged. That includes investors seeing tailwinds for short- and long-term growth.
Unsurprisingly, large firms like Pfizer Inc. PFE-N and Abbott Laboratories Ltd. ABT-N have seen significant share price jumps thanks to their role developing successful vaccines as well as diagnostics for COVID-19.
“The recent driver has clearly been the pandemic,” says Nick Waddell, editor of the Cantech Letter, which tracks up-and-coming health care device makers and biotechnology stocks.
In addition, U.S. politics regarding health care funding have also become less volatile and uncertain, providing a clearer path for profitability for insurers and care providers south of the border. Notably, the S&P 500 Health Care Index has grown by about 25 per cent over the last year.
While these shorter-term drivers are significant, the long-term outlook is arguably more compelling for investors.
“Several major catalysts have changed the landscape and perception of the health care sector as an investment,” says Paul MacDonald, chief investment officer and portfolio manager with Harvest Portfolios Group Inc.
Given the aging population in developed economies and the growing middle class in emerging markets, the need for health care is growing exponentially. Technology will also be a key driver of health care’s evolution for some time.
As a sector, health care promises to help advisors and investors accomplish both growth and income goals.
“It’s a really interesting space that’s going to get a lot bigger,” says Grant White, a portfolio manager with Endeavour Wealth Management at Industrial Alliance Securities Inc. in Winnipeg.
Even in the U.S., growth potential cannot be understated. Recent data from the Centres for Medicare and Medicaid Services in the U.S. show spending on a per capita basis for personal health care services is more than US$19,000 for individuals 65 and older. That’s almost double that of individuals ages 45 to 64.
What’s more, the percentage of Americans aged 60 and older is forecasted to grow to almost 29 per cent by 2050 from 23 per cent in 2020, according to a United Nations’ World Populations Prospects report.
Similar trajectories are happening in other developed nations, Canada included, Mr. MacDonald says.
Growth is expected to be even more dramatic in developing countries. Consider that over the past two decades health care spending in China and India has grown to about US$800-billion annually from less than US$100-billion. That’s an annual growth rate of more than 14 per cent, based on data from the World Health Organization. At that pace, combined spending on health care will grow to almost US$3-trillion a decade from now.
Structuring the portfolio
Although the long-term growth outlook for health care is positive, there’s a knock against investing in this sector for income-seeking clients: Even the most established firms have low divided yields, often paying 2 per cent or less annually.
“Yet, there are ways to structure a portfolio to provide clients with income on a regular basis without having high dividends,” Mr. White says. “What investors really should focus on is having high-quality health care investments in the portfolio.”
Harvest’s Healthcare Leaders Income ETF does just that, investing in 20 of the largest, most profitable U.S. health care companies with global reach. The holdings are equally weighted and diversified across subsectors like pharmaceuticals, biotechnology, device manufacturing, health care insurance and care providers (i.e. hospitals).
What makes Harvest’s exchange-traded fund (ETF) stand out from other health care ETFs is its approach to generating income.
“The benefit for those looking for health care exposure is our fund is designed for people looking for enhanced cash flow,” Mr. MacDonald says.
While dividends are part of that equation, much of the ETF’s current 8 per cent annual yield is generated from a covered-call options strategy on about a third of the value of its holdings.
With a covered-call overlay, investors forgo some upside of capital growth in the near-term in favour of monthly cash flow. Yet, the Harvest ETF’s track record of producing high-yielding, consistent income is hard to ignore. Since its inception in 2015, the fund has returned (including dividends and options premiums) more than 7 per cent annually.
The ETF also trades on the Toronto Stock Exchange (TSX), allowing investors to choose from three currency strategy options: the Canadian-dollar hedged HHL-T, the unhedged HHL-B-T, and the U.S.-dollar version HHL-U-T.
All three versions of the ETF offer what many Canadian investors lack: adequate exposure to the health care sector.
Many investors often have a home country bias, with much of their portfolio exposed to the TSX. Yet, only 1.2 per cent of the TSX’s market capitalization entails health care companies, compared to more than 14 per cent of the S&P 500.
“Our ETF’s holdings alone, by market capitalization, are US$1.2-trillion larger than the entire S&P/TSX Composite Index’s market cap,” says Mr. MacDonald.
One concern for health care is valuation.
“The challenge of trying to invest for growth and income in the sector is many stock valuations have got ahead of themselves,” Mr. Waddell says.
However, Mr. MacDonald feels the sector traded at a discount prior to the pandemic, and still does relative to the broader U.S. market.
In the long term, given the demographic drivers, health care likely has much more room to grow. Harvest’s Healthcare Leaders Income ETF offers exposure to that with a robust income stream along the way.
“From our perspective, this ETF provides that long-term growth exposure, only we’re willing to give up a little bit of that in favour of getting higher, more consistent income,” Mr. MacDonald says.