Technological innovations are making health care a growth as well as a defensive investment choice.Getty Images
Robotic surgery is no longer science fiction. Clinics are increasingly using the technology in everything from orthopedic to neuro-diagnostic procedures.
The medical sub-sector is still in its infancy, set to balloon into a US$20-billion market by the end of the decade, says Paul MacDonald, chief investment officer at Harvest ETFs in Oakville, Ont. The projection serves as a vivid example of a shift that’s challenging conventional investing wisdom around the health-care sector.
“We often think of that space as defensive or a value play. But there are absolutely areas of growth,” Mr. MacDonald says.
While environments in the economy and equity markets might be darkening, health care finds itself basking in a relatively unique light. It’s a tried-and-true investment, combined with a high degree of upside potential that was less pronounced before.
High-flying technology stocks have captured much of the hype and investor attention related to artificial intelligence. But those advancements hold deep implications for almost every health care sub-sector, from pharmaceuticals to diagnostic systems. That, plus the sector’s relatively inelastic demand and favourable demographic trends, present a compelling near- and medium-term investment case.
“We’re bullish on health care right now, and there’s two reasons,” says Andrew Pyle, senior advisor and portfolio manager at the Pyle Group in Peterborough, Ont., part of CIBC Wood Gundy. “We’re bullish from a growth point of view, because we’re seeing integration of innovation that’s not quite at the level of tech firms but close. On the defensive side, health care is also one of the best recession-proofing tools you can use in a portfolio.”
In recent months, Mr. Pyle has shifted clients into an overall exposure of about 10 per cent in international health care. “We see it as a very important weighting for both growth and defence,” he says.
Taking a broad-based approach through exchange-traded funds (ETFs) that have a sectoral focus is one way to get efficient exposure. “Holistically, you want to have diversification within sub-sectors. You want some growth exposure through medical technologies and higher growth areas like obesity treatments, as well as exposures that tilt toward defence, like health-care insurance companies,” Mr. MacDonald says.
For the past five or six years, Mr. Pyle and his associate advisors have employed an ETF-based strategy as more options opened up for Canadian advisors and investors. “It’s a very easy and clean way to get that exposure to the sector. For the majority of investors, it’s difficult to invest on a company-by-company basis. To gain diversification, and to make sure you’re getting exposure to the areas that will experience better growth, there are few better options than an ETF.”
For Canadian investors in particular, a health-care allocation can represent both a sector diversification for their portfolios and a much-needed geographical one, given the relatively thin selection of domestic health care stock listings.
Several Canadian-listed ETFs have a focus on global health care, which means an investor can get that international diversification without incurring additional currency-related fees. “A lot of these ETFs give us that exposure in Canadian dollars,” Mr. Pyle says.
Many value-oriented ETFs similarly provide a significant health-care exposure, a geographic diversification, and exposure to other sectors that will navigate choppier market conditions better than others, says John Riedl, an advisor with the Riedl Group at National Bank Financial in Toronto.
Broad-based value ETFs are also a way to gain exposure while avoiding a concentration risk, Mr. Riedl says.
With an uncertain interest-rate outlook roiling markets, and economic data throwing off mixed signals, the health of the economy and stocks is being called into question. Mr. Riedl’s recommended treatment?
“We’re leaning into themes that are more value-oriented right now, and trimming growth. We’re not trimming funds holding health care.”