IYH: Diversified Healthcare ETF Suitable For Short Term Investment

Summary

• IYH gained 12% during 7 weeks from February 22, and then fell by 9% in the next 3 weeks.
• IYH posted strong price returns over the medium and long term, but generated 1% yield.
• Biotechnology and Life Sciences Tools & Services companies historically had cyclical price movements, and have remained poor performers for almost a year.
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I covered the iShares U.S. Healthcare ETF (NYSEARCA:IYH) on 22nd February, 2022, when the stock was trading at $267.95. In the next seven weeks, this stock gained around 12 percent to reach a closing price of $300 on 8th April, 2022. The price has started falling since then and dropped back almost to the February 22 level. The ETF closed at $272.95 at the end of trading day April 29, 2022, a fall of 9 percent from 8th April. Incidentally, this price movement covered a significant part of the 52-week price range between $260.11 and $302.66.

As I discussed last time, this price rise was not unexpected. All the healthcare ETFs based on Russell 1000 Health Care RIC 22.5/45 Capped Index have showcased strong growth over the years, and also fast recovery from the COVID-19 pandemic related market crash in mid-March 2020. In my last coverage, I said that the price movement of First Trust Health Care AlphaDEX ETF (FXH), Invesco S&P 500 Equal Weight Health Care ETF (RYH), John Hancock Multifactor Healthcare ETF (JHMH), and Fidelity MSCI Health Care Index ETF (FHLC) were almost the same as iShares U.S. Healthcare ETF.

iShares U.S. Healthcare ETF also declared a Q1, 2022 dividend of $0.6872 on 24th March, with record date being 25th March. The distribution was along expected lines. Moreover, the annual yield at 1 percent was pretty low. Thus it had a very negligible impact on the price movement, as few income seeking investors would invest in such a poor income generating diversified healthcare ETF.

An analysis of its top 30 common equity holdings (holding 80 percent of the entire portfolio) reveals that almost all these stocks had a negative return since April 8. I have not considered the investments in Anthem, Inc. (ANTM), which is 2.4 percent of total portfolio, due to its ongoing merger with WellPoint Health Networks Inc. (WLP). Out of those 30 holdings, 15 stocks have recorded double-digit negative growth, and 9 stocks have posted a negative growth in excess of 15 percent.

These 9 companies were – Edwards Lifesciences Corporation (EW), AbbVie Inc. (ABBV), HCA Healthcare, Inc. (HCA), Danaher Corporation (DHR), Moderna, Inc. (MRNA), Intuitive Surgical, Inc. (ISRG), Illumina, Inc. (ILMN), DexCom, Inc. (DXCM), IDEXX Laboratories, Inc. (IDXX). Only Merck & Co Inc. (MRK) was able to post a positive growth (that also only 1 percent) during these past three weeks. This indicates that the overall healthcare sector is going through a bearish rally.

On the other hand, an analysis of return of these 30 stocks from 22nd February to 29th April reveals that 15 stocks have generated positive growth, out of which 5 stocks – Eli Lilly and Company (LLY), Vertex Pharmaceuticals Incorporated (VRTX), Johnson & Johnson (JNJ), Merck & Co Inc., Bristol Myers Squibb Company (BMY) - have posted double-digit growth. At the same time, only IDXX has posted a negative growth in excess of 15 percent during the past 10 weeks.

This current bearish rally seems to be a temporary phenomenon, as historically iShares U.S. Healthcare ETF has been successful in posting positive returns over the long and medium run. Since its inception on June 12, 2000, i.e. almost 22 years ago, IYH generated an annual average price growth of 8.83 percent. Over the past 10 years, IYH's market return was quite lucrative at 15.55 percent. Over the past 3 years and 5 years, IYH has recorded an average market price growth of 15.61 percent and 14.68 percent respectively.

During the past five years, iShares U.S. Healthcare ETF has posted 15 percent plus price growth in all the years except in 2018. In 2018, the overall US equity market was on a slowdown as an aftermath of interest rate hikes, tax cuts, and an increase in tariff. Despite the COVID-19 pandemic, IYH was able to generate 15.6 percent price growth during 2020. Again during 2021, when biotechnology and life sciences stocks suffered immensely, IYH has been able to post an impressive price growth of 23.4 percent.

In my previous coverage of iShares U.S. Healthcare ETF, I was optimistic about this stock. While some of my reasons for backing this stock (such as diversified portfolio, price performance in medium and long term, etc.) are still prevailing, certain factors now raise skepticism.

In my opinion, this healthcare ETF's stock selection is very balanced and well diversified. Pharmaceutical and healthcare equipment companies hold half of the ETF's total investments. These two sectors are a safe bet, as these sectors do not remain bearish for a longer time.

However, around 43 percent of the entire portfolio is invested in biotechnology, life science tools and services, and managed healthcare segments. Unfortunately, these three segments are not performing well since late August 2021. Though these segments have good future growth prospects, they still have a tendency to stay bearish for almost a year in various past occasions, such as in the year 2016 and 2018.

Even after seven months of downward trend, the majority of stocks in Biotechnology and Life Sciences Tools & Services segments are yet to post positive returns. I fear that these stocks may take another three to six months to fully recover. The ETF is currently trading at a premium of 5 percent over its 52-week low price, and I fear that this floor price might get breached and the stock finds a new bottom.

The simple moving averages (SMA) can provide us with a clearer picture. 200-day SMA of 282.42, and 100-day SMA of 283.6 suggests that there is scope for downward movement. The 50-day SMA (282.37) is again lower than the 100-day SMA. Even if 30 percent of the portfolio performs poorly, it will be difficult for the ETF to generate high returns, as on an average the pharmaceutical stocks don't have exceptionally high returns at present.

Thus, I am not going to rush to buy iShares U.S. Healthcare ETF. I am willing to wait for some more time for the price to fall down further, maybe another 3 to 5 percent, and then accumulate stocks of this ETF. In my opinion, investors who liquidated IYH shares once it crossed $300 did the smart thing, and I’ll opt for the same strategy, once I get hold of this stock within a price range of $260 to $265. As this ETF is not paying strong dividends, and has a tendency of moving in a cyclical pattern, I'll prefer to make IYH a trading instrument.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.