Healthcare ETF Turns Gray Into Green
While many might fib about their age, the world’s population is getting older. Between 1950 and 2000, the median age of the global population rose from 23.6 years to 26.4 years. And by 2050, it’s expected to reach 37 years. Around that same time, 19 developed countries will reach median ages greater than 50 years.
As the world gets steadily grayer, developing countries are already struggling to cope with lifestyle diseases. An improving standard of living in the emerging markets has paradoxically spurred higher rates of obesity, diabetes and cancer. The increasing prevalence of such diseases is, in turn, driving demand for health care. Recent data show that China now has about 90 million diabetics, which means the Middle Kingdom is home to the largest population of diabetics in the world. And India comes in second, with almost 62 million diabetes sufferers. By comparison, the US has an estimated 25.8 million diabetics.
The resulting demand for health care means spending in this sector is expected to outpace economic growth in both the developed and emerging markets. A study conducted by PriceWaterhouseCoopers estimated that while gross domestic product (GDP) is expected to grow 38 percent in the U.S. and 115 percent in China over the course of this decade, health care spending is expected to jump 57 percent and 167 percent, respectively.
In the emerging markets, demand growth is largely due to the underpenetration of health care services. Meanwhile, the US has significant catalysts for greater spending, including health care reform, the pending wave of baby boomer retirees, and the ongoing economic recovery.
Over the past several years, growth in health care spending has slowed significantly, largely thanks to high unemployment in the wake of the Great Recession. But health care spending should soon ramp up as more Americans return to work and once again have access to benefits through their employers. And assuming President Obama’s landmark health care reform survives the next Congress, its massive expansion of coverage will provide a further boost.
That’s made iShares S&P Global Healthcare Sector Index Fund (NYSE: IXJ) an increasingly attractive proposition. The exchange-traded fund (ETF) covers the full breadth of the health care industry, with exposure to biotech firms, pharmaceuticals, medical devices and insurers.
Despite the fact that its 92 component holdings are all based in the developed world—top positions include names such as Johnson & Johnson (NYSE: JNJ), Pfizer (NYSE: PFE) and Novartis (NYSE: NVS)—a surprisingly large percentage of the total revenues generated by the names in the ETF’s portfolio are derived from emerging economies.
For example, almost 15 percent of Pfizer’s revenues are sourced from emerging markets, and sales growth in those geographies is running about 8 percent annually. Based on the most recently available quarterly reports from the fund’s largest holdings, about 25 percent of total revenues are produced in the emerging markets.
The tax-efficient ETF has an annual turnover ratio of just 6 percent. Additionally, the fund has a 0.48 percent annual expense ratio, which makes it an affordable play on the inexorable rise in global health care demand.
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