At the San Francisco Money show I had the chance to hear HealthShares founder Jeffrey Feldman explain the rationale for his fast-growing family of exchange-traded funds.
He made a compelling and forceful case why using HealthShares ETFs is a logical way to broaden your healthcare exposure away from just big pharma while also helping America overcome its healthcare budget crisis.
America is spending about $2 trillion a year on healthcare and it is escalating at the alarming rate of 9% per year. If we just continue to primarily treat the symptoms of health problems with prescription drugs, demographic trends in America will force expenditures to explode along with the government budget that covers most of these costs for seniors. In short, if nothing is done differently and current cost and budget trends continue, America risks becoming an economic basket case.
But what if instead of just treating diseases, we focused our efforts on breakthroughs that cure diseases such as diabetes? For every cure the budget savings to consumers and the government would be enormous. But as Mr. Feldman points out, this is not the business model of big pharma but rather the purview of smaller, more entrepreneurial firms. Interestingly, half of the 4,500 drugs in phase III clinical trials are being developed by mid-cap, small-cap and even micro-cap companies.
These firms have a harder time raising capital to fund their research and development while investing in these firms is of course a riskier proposition. Many will fail and but the few that succeed will do so on a spectacular scale. But how is an average investor supposed to even begin to figure out which firms have the best chance of succeeding without a PhD in biotechnology from MIT?
ETFs to the rescue. Instead of trying to pick individual stocks, why not invest in a basket of them equally weighted and let nature take its course. This is similar to Chartwell ETF’s “Buy Countries, Not Stocks” investment strategy. Instead of trying to pick stocks in a country like Australia, we recommend investing in an ETF like iShares Australia (EWA) that represents a basket of Australian stocks.
HealthShares offers investors a menu of ETFs that focus in on vertical segments of the healthcare industry. With the help of your financial advisor, you can pick a few of them to spread your risk. Think of it as going hunting for big gains with both your shotgun and your rifle. Mr. Feldman refers to this strategy as “diversified concentration” - a nice and apt turn of phrase.
HealthShares offers investors a number of benefits that are hard to find in the marketplace. Take the HealthShares Cardiology ETF (HRD) which contains companies trying to develop products to reduce the $400 billion plus that Americans spend annually on cardiovascular disease and stroke. HRD’s universe of companies is global, with company market values between $200 million and $15 billion and mid-cap companies account for 55% of exposure. There are 22 companies in the ETF basket which is close to optimal in terms of the tradeoff between diversification and return. Even better is its low correlation to the S&P 500 index at only 0.61. I also like the way the companies are roughly equally weighted in the ETF basket with the highest company weighted at 4.5% and the lowest at 3.5%. Like all HealthShares, HRD is normally rebalanced and reconstituted on a quarterly basis.
There are twenty different HealthShares ETFs to choose from giving investors a wide range of choice. The broadest ETF is HealthShares Composite ETF (HHQ) which features 80 stocks. Other ETF choices include critical areas such as neuroscience, emerging cancer, orthopedic repair, and infectious diseases.
Perhaps the most intriguing of the HealthShares is the Diagnostics ETF (HHD) which goes to the heart of the mission of analyzing and diagnosing diseases so that they can be prevented and cured. This ETF also highlights a bonus of many of the HealthShares; many of the companies in their ETF baskets are potential takeover candidates. In the Diagnostics ETF, Dade Behring Holdings Inc. (DADE) was picked off by Siemens just last month and Laboratory Corp. of America (LH) seems to be another prime takeover target.
Investors should pay close attention to HealthShares ETFs. They have a strategy that is well thought out, brilliantly executed, and offer investors a great way to diversify their portfolio while providing the opportunity for big capital gains. Chartwell ETF Advisor’s New Venture ETF portfolio has 20% allocated to two HealthShares and you should consider adding a few to your global ETF portfolio.
By Carl Delfeld of the Chartwell ETF Advisor
