Can the healthcare sector boost your portfolio’s immune system in 2019?

Participants in the equity markets have very diverse investing strategies. There are those who actively trade multiple times a day, and those who would rather bet on the economic growth of a country or even the world as a whole. When uncertainty and fear enter the market, there are those who stand steadfast, holding or even adding to their positions. Others hope to close at the perfect time, fleeing to so-called recession-proof assets or sectors such as gold. In market environments such as the one we are in today, investors should not ignore the possibility of adding the healthcare sector to their defensive portfolio. 

With a preliminary look at gold and popular sectors such as technology and financials, as well as typically non-volatile sectors such as consumer staples, it seems that gold, consumer staples, and health care suffered the least during the period January 1, 2007 to March 31, 2009, with gold clearly taking first place among these three assets.  

Jan. 1, 2007 to Mar. 31, 2009 

   Max Drawdown (%) 

SPY Index 

(52.18) 

MSCI ACWI Index 

(56.23) 

SPDR Consumer Staples  

(30.63) 

SPDR Utilities 

(42.83) 

SPDR Health Care 

(39.45) 

SPDR Financials 

(70.32) 

SPDR Technology 

(51.57) 

Gold $USD/OZ spot 

(25.75) 

In fact, if the lookback period is expanded to December 2009 and we consider percentage return, gold performed very well, rising 72.29% between 2007 and 2009. At this point, it may seem questionable to even consider investing in anything other than this remarkable asset. However, most retail investors do not have the capability, or the capacity to time their purchase to maximize their return. Even if they can, they may be looking for ways to diversify. Enter healthcare stocks. 

Granted, consumer staples had a lower drawdown, and the utilities sector was not that much worse. It may seem that choosing any one of these sectors would be equally effective. However, when we compare long term total returns, the health care sector has fared better, even after two market crashes (pay particular attention to returns 2001-2003 versus other sectors). 

Displaying historical returns is not enough to support an investment recommendation. To form a more convincing argument, macroeconomic conditions play a key role in making the healthcare sector an attractive source of long-term returns.  

This analysis will focus on the iShares Global Health Care ETF (NYSE: IXJ) and its Canadian equivalent (TSX: XHC). This fund contains global healthcare stocks, 71% of which reside in the U.S., and 21% of which reside in Western Europe, with the rest scattered across the Asia Pacific. 

Within the U.S., employment in the health sector is nearly at a perfect linear increase, and the trend is well mimicked in Germany, Japan, and the U.K., which make up a total of 12% of the portfolio. 

To be more specific, most of the fund is in pharmaceuticals, combining with equipment and biotechnology to add up to roughly 75% of the total. Given these weightings, hospitals and hospital services can be ignored in the analysis for now, which is convenient given each country’s distinct preferences for publicly versus privately funded health care. While the public/private debate can be saved for another discussion, it is clear that spending on retail prescription drugs has been consistently increasing for the last 25 years, due in large part to an aging population. For much of the same reason, global demand for medical equipment has also been on the rise. While unfortunate for patients, cardiac rhythm and interventional cardiac equipment sales peaked in 2017 at $14.8 billion and $23.6 billion respectively. 

R&D expenditures by medical device manufacturers have reached an all-time high following a surge during the financial crisis, topping off at $88 billion in 2018. Without knowing the details not much can be said about valuation, but firms are certainly putting in a lot of effort to reach the next breakthrough. Combined with the fact that many pharmaceutical companies are now teaming up with innovative artificial intelligence companies, it could be wise to pick up some companies now before these new synergies start showing results. 

And lastly, another benefit of maintaining a portfolio of healthcare equities, particularly when management fees are low or nonexistent, is the added return from dividends. In the last four years, attribution shows that the income return on the iShares Global Health Care ETF was 11.69%. compared to 22.95% for BMO’s US Dividend ETF (TSX: ZDY) and for 18.99% Vanguard’s U.S. High Dividend ETF (NYSE: VYM). While of course dividends aren’t as prominent in a fund whose purpose is not to generate fixed income, the relatively high dividend yield of 2.05 means investors can enjoy strong capital appreciation while also receiving effectively tax-free dividend income. 

All this is of course only a preliminary analysis and does not constitute a firm investment thesis, but hopefully the evidence provided will pique the interest of some investors.