Thanks to lackluster global economic activity for most of the year and rising geo-political tensions, sectors less sensitive to economic cycles, including the U.S. healthcare industry, have easily managed to hold out this year. The broad Health Care Select Sector SPDR ((XLV - ETF report) ) has beaten the fund tracking the overall markets – SPDR S&P 500 (SPY).
Though that’s the case, increased mergers and acquisitions (M&As) are also paving the way for stronger business and diverse offerings. Moreover, new product offerings, increased pipeline visibility and restructuring activities are fuelling confidence in the sector.
A similar trend has been seen in the medical device and equipment sector – a sub sector of the healthcare industry. Several MedTech majors struggling with core businesses are looking to explore potential therapies through collaborations and alliances to focus on their areas of expertise (read: XPH Crushing the Pharma ETFs Competition).
One of the top companies in the space, Abbott Labs ((ABT - Analyst Report) ) recently signed a deal with Mylan for the sale of its non-U.S. developed markets specialty and branded generics business.
Medical device companies are coming up with efficient capital allocation plans, expanding their product offerings and investing in emerging geographies in order to survive in the highly regulated medical device industry, which is burdened with stringent and complex procedures (read: Medical Device ETF Investing 101).
Given the stepped up M&As and a shift in their business models toward a value-based healthcare structure amid rising pricing pressure and other bottlenecks in the industry, a look at one of the top ranked ETFs in the space could be the way to target the best of the segment with lower levels of risk.
Also, the sector might be a good defensive bet to play the current market turmoil arising from the Argentina debt default, banking problems in Europe and growing geo-political tensions in Israel and Ukraine.
About the Zacks ETF Rank
The Zacks ETF Rank provides a recommendation for the ETF in the context of our outlook for the underlying industry, sector, style box or asset.
The aim of our models is to select the best ETFs within each risk category. We assign each ETF one of the five ranks within each risk bucket. Thus, the Zacks ETF Rank reflects the expected return of an ETF relative to other products with a similar level of risk.
For investors seeking to apply this methodology to their portfolio in the health care space, we have taken a closer look at the top ranked iShares U.S. Medical Devices ETF ((IHI - ETF report) ). This ETF has a Zacks ETF Rank of 2 or ‘Buy’ and is detailed below (see: all the Top Ranked ETFs).
IHI in Focus
Launched in May 2006, IHI provides a targeted exposure to the U.S. medical device sector by tracking the Dow Jones U.S. Select Medical Equipment Index. The fund manages an AUM of $687.1 million and trades in light volumes of roughly 60,000 shares a day.
The fund holds a small basket of 49 stocks which are quite concentrated in its top five holdings. Abbott, Medtronic Inc and Thermo Fisher form the top three spots having a combined exposure of more than one-fourth of fund assets. The product has a definite tilt toward large cap securities with 66% of assets, followed by 19% in mid caps and the rest in small caps.
Sector-wise, Medical Equipment occupies the bulk of exposure with three-fourths allocation, followed by 15% allocation to Medical Supplies and 10% allocation to Pharmaceuticals (see: all the Healthcare ETFs here).
IHI charges a reasonable 43 basis points as expenses. The product has a modest dividend yield of 0.54% but has a good performance track record. IHI has returned 10% in the year-to-date frame, 22% in the past one year and a compounded 67% in the past three years.
Thus, given its impressive track record, solid fundamentals in the space coupled with a favorable Zacks ETF Rank, the fund is expected to continue its winning streak and outperform the broader markets in the near term. Investors can consider adding this fund to their portfolio for a more diversified approach.
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