Are Global Health Care ETFs Worth Prescribing?
Conservative investors and risk-takers alike have been rewarded for owning U.S. health care stocks and ETFs focusing on those names in recent years.
The data supports that assertion. A look at three major health care ETFs, all of which do things a little bit differently, shows significant out-performance of the S&P 500 over various time frames.
For example, the Health Care Select SPDR (NYSE: XLV) is up 30.3 percent in the past five years compared to 12.3 percent for the S&P 500.
Since December 2011 when it became a Market Vectors fund, Market Vectors Pharmaceutical ETF is up almost 20 percent. The iShares Nasdaq Biotechnology ETF (NASDAQ: IBB) has nearly doubled in the past five years.
Bottom line: Investors have done well when staying at home with U.S. health care stocks, but that does not mean there are not global opportunities worth considering. After all, some of the biggest health care companies in the world are not U.S. firms.
Here is a look at some international developed market health care ETFs to see if going global with this sector is a better idea than staying domestic.
iShares S&P Global Healthcare Sector Index Fund (NYSE: IXJ)
One thing about the iShares S&P Global Healthcare Sector Index Fund that is important to note is that it is a global fund and that means U.S. stocks are included.
Actually, the U.S. might loom too large in IXJ (almost 60 percent of the ETF’s weight), diminishing international exposure in the process. Switzerland is the only other country to land a double-digit allocation in IXJ.
Through the end of last year, IXJ’s net asset value had gained 10 percent over the past three years and 4.3 percent over the past five, two performance’s that are better than ETF’s underlying index over the same times, according to iShares data. Obviously, that five-year run does not compare favorably with XLV. In IXJ’s favor, it is worth noting the $645 million ETF has a beta of just 0.95 against the S&P 500.
iShares MSCI ACWI ex US Health Care Sector Index Fund (NYSE: AXHE)
To take the U.S. out of the health care equation, investors have a few ETF options and one is the iShares MSCI ACWI ex US Health Care Sector Index Fund.
Pharmaceuticals names account for 80 percent of this fund’s weight, leaving only token exposure to health care equipment makers, services providers and biotechnology names.
It is hard to argue with AXHE’s composition, though, as the ETF has returned 36.6 percent since its July 2010. The problem with AXHE is that this is the type of ETF naysayers love to hate. It has less than $13.7 million in assets under management and trades just 2,500 shares per day.
Focusing on those statistics could mean glossing over the fact that plenty of AXHE’s 68 holdings can be described as heavily traded, such as Sanofi, Teva and AstraZeneca (NYSE: AZN). Heavy on developed markets, AXHE’s has slightly outperformed its index since inception.
SPDR S&P International Health Care Sector ETF (NYSE: IRY)
The SPDR S&P International Health Care Sector ETF is the more senior member of the ex-U.S. health care ETF duo, having debuted in July 2008. The $32.5 million fund has returned an admirable 21.6 percent in the past two years.
While AXHE and IRY both focus heavily on non-U.S. large-cap pharmaceuticals names, there are important differences between the two. For example, IRY is home to 117 holdings compared to 68 for AXHE and the SPDR offering is slightly more expensive with an annual expense ratio of 0.5 percent compared to 0.48 percent for AXHE.
Roche (OTC: RHHBY) and Novartis (NYSE: NVS) are the top two holdings in both ETFs, but that pair represents over 25 percent of AXHE’s weight while accounting for 22.4 percent of IRY’s. IRY also features slightly smaller allocations to pharmaceuticals at the sector level and to Switzerland at the country level.
One thing investors might like about IRY over AXHE: A lower beta. IRY’s is 0.60 compared to 1.1 on AXHE.
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