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Stock markets may be volatile, but some things haven’t changed: an aging population, economic growth in the developing world, technological innovation, and higher discretionary spending among the wealthy. These non-cyclical factors all drive health care, which is usually regarded as a defensive sector because it tends to remain relatively stable.

“Health care is a superior good,” says Paul MacDonald, chief investment officer and portfolio manager at Harvest Portfolios Group Inc. “You need it in up markets and down markets. As a necessity, health care has good visibility in the current uncertain environment, which is why the market is gravitating toward the sector.”

Health care stocks have shown great growth potential in the past, and they show the ability to generate healthy income and dividends. Advisors expect the trend to continue.

“Coming out of the COVID-19 pandemic, people have been putting a premium on health care,” says Brianne Gardner, wealth manager and investment advisor with Velocity Investment Partners at Raymond James Ltd. in Vancouver.

Advances in areas such as medical devices, pharmaceutical and biopharmaceutical drugs, and robot-assisted surgeries are also promising for health consumers and for investors.

“Constant innovation to improve the quality of life supports increasing demand,” Ms. Gardner says.

Globally, a rising middle class is another key factor. In the developing world, health care expenditure in countries such as China and India has been growing at an average annual rate of about 14 per cent since 2000, Mr. MacDonald says.

“As wealth increases over time, a growing portion of that has been shown to be spent on health care,” he notes.

The World Health Organization has reported that global spending on health has doubled in real terms over the past two decades, topping US$8.5-trillion and almost 10 per cent of gross domestic product.

In developed markets, the number of people over 60 years of age is growing rapidly. Canada now has more than 7 million people aged 65 and older, making up 19 per cent of the population. In the next 20 years, seniors are projected to comprise almost one-quarter of the population. As this happens, the amount of money seniors spend on health care is increasing exponentially, Mr. MacDonald says.

“The health care sector has been growing and will continue to grow on the back of changing demographics and an aging population,” says Nicholas Schulman, senior wealth advisor and portfolio manager with the Schulman Family Wealth Management Group at National Bank Financial Wealth Management in Montreal.

ETF offers superior exposure to the sector

Mr. Schulman holds Harvest Healthcare Leaders Income ETF HHL-T as a satellite position in clients’ portfolios. He says the ETF facilitates an easy way to participate in the sector. “It offers the best concentration and best exposure to companies in health care.”

The ETF invests in an equally weighted portfolio of 20 large- to mega-cap health care companies, and some smaller companies that are leaders in specific subsectors. Companies are selected for their potential to provide an attractive monthly income and long-term growth.

To arrive at a diversified portfolio, Harvest starts with a universe of more than 3,000 health care companies, Mr. MacDonald says. The list is then narrowed to 85 companies that have a minimum market capitalization screen of $5-billion, are listed on an exchange in North America, and have options available.

“Out of these 85 companies, we use a structured process to select 20 stocks that meet specified balance sheet, earnings and risk parameters,” he says.

Harvest uses an active covered-call strategy to generate an enhanced monthly income and reduce volatility. The strategy applies on up to 33 per cent of each equity security held in the ETF to generate additional cash flows and provide enhanced monthly distributions, leaving the rest of the securities to accumulate growth. The income from using covered calls is taxed generally as capital gains.

Mr. MacDonald says large health care companies have unique advantages in an inflationary environment, characterized by low commodity price exposure, high margins, and the ability to maintain a competitive advantage and have a dominant market share.

In addition, the health care sector has consistent earnings in both good and bad times. Mr. MacDonald notes that health care companies trade at attractive valuations with strong balance sheets compared with the broad market.

“The ability to deliver a consistent monthly distribution is key, because clients rely on the expected income,” he says.

Advertising feature produced by Globe Content Studio with Harvest Portfolios Group. The Globe’s editorial department was not involved.