A Bullish Prognosis for Global Healthcare ETFs

Includes: IXJ, JNJ, MRK, NVS, PFE, XLV
by: Mike Havrilla
Despite concerns over the health of the domestic economy along with surging food and energy prices, the healthcare sector has failed to garner investor interest as a safe haven. Most healthcare exchange-traded funds [ETFs] and drug stocks continue to languish near multi-year lows, despite an aging Baby Boomer population and ever-increasing proportion of the gross domestic product [GDP] accounted for by healthcare spending.
Last year, total health expenses grew at twice the inflation rate (6.9%), accounting for 16% of the GDP at $2.3 trillion. This growth rate is expected to continue over the next decade to a level of $4.2 trillion in 2016, accounting for 20% of the GDP, based on statistics provided by the National Coalition for Health Care website.

Two popular ETFs that provide investors with diversified exposure to the healthcare sectoraree the State Street Healthcare SPDR (NYSEARCA:XLV) and iShares S&P Global Healthcare (NYSEARCA:IXJ). I prefer the latter, based on its exposure to companies based outside of the United States and total number of holdings at 79, which is about 50% more than the stock holdings of XLV.
The top 10 holdings for XLV account for about 53% of the assets, with the majority of these positions invested in US-based big pharma companies. IXJ provides a more balanced top 10 holdings list that accounts for about 50% of assets and is divided evenly between US-based and European big pharma and diversified healthcare giants. The top three holdings in XLV include Johnson & Johnson (NYSE:JNJ) (13.9%), Pfizer (NYSE:PFE) (9.9%), and Merck (NYSE:MRK) (6.0%) versus IXJ which holds Johnson & Johnson (8.9%), Novartis (NYSE:NVS) (6.6%), and Pfizer (6.1%).

Despite the fact that XLV has attracted about fourfold more net assets and has a much higher trading volume, IXJ should not present any liquidity concerns given that its average daily trading volume is over 50,000 shares with over $600 million in net assets. IXJ has outperformed XLV for all of the timeframes outlined in this chart except for the two-year return, and I believe the geographical diversification and access to foreign-listed companies will continue the performance trends in favor of IXJ.
Although the big pharma and diversified healthcare mega-caps in both of these funds have global reach and operations, the foreign players have the distinct advantage of proximity and opportunities to provide healthcare products and services to growing frontier and emerging markets in Eastern Europe, the Middle East, and throughout Asia.