Why these three healthcare ETFs beat peers in the pandemic

by Tom Bailey from interactive investor |

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A trio of ETFs have offered investors a way to play the pandemic, but returns have varied. 

In a time of pandemic, owning healthcare stocks sounds like a good idea. Demand for healthcare services have increased, necessity has spurred innovation and governments have been happy to throw money at the sector.

Thankfully for investors, there are no shortage of ETFs tracking an index of healthcare-related equities. While such ETFs may have been created as a way for investors to profit from the secular trend of ageing populations causing an increase in healthcare spending, they have also offered investors a way to play the pandemic.

On average, they have not served investors badly, with the Global Equity ETF – Health and Biopharma sector returning just over 14% year-to-date (total return in sterling terms, as all subsequent returns in this article will be). In comparison, the MSCI All-World index has returned around 9%.

However, the choice of ETF was crucial. As the table below shows, the performance of a collection of healthcare-related ETFs available through interactive investor is quite varied, with year-to-date returns ranging from 44.8% to 6.7%.

This is because while each ETF in the list tracks an index of healthcare stocks, they can track very different parts of this huge sector. 

As the table below shows, the best-performing ETF is L&G Healthcare Breakthrough ETF (LSE:DOCT), with a return of 44.8%. It was followed by iShares Healthcare Innovation UCITS ETF (LSE:DRDR), with 36.3% and the HAN-GINS Indxx Healthcare Innovt ETF Acc GBP (LSE:WELP) with 20.7%.

What these top three healthcare ETFs have in common is that they track indices that aim to track new and innovative parts of the healthcare sector. Inevitably that means they have holdings that can also be defined as growth and technology stocks.

For example, the two biggest holdings of L&G Healthcare Breakthrough ETF are Illumina (NASDAQ:ILMN) and Teladoc (NYSE:TDOC). These are healthcare stocks, but they also come under the tech and growth umbrella. Both are also often found in the portfolios of high-performing actively managed tech funds. Illumina is also a substantial holding for HAN-GIN ETF.

So while these three top-performing ETFs have benefited alongside the healthcare sector as a whole, they have received an additional boost through being exposed to the strong performance of tech and growth stocks this year. 

All three had quite different returns as a result of the indices they track. The category of “innovative healthcare” is not exactly an established asset class, so the indices tracking such stocks have been constructed differently.

At the other end of table, healthcare ETFs with a European focus are among the worst performers. At the bottom of the table is Amundi ETF MSCI Europe Healthcare A/I GBP (LSE:CH5) and SPDR MSCI Europe Health Care ETF EUR (LSE:HLTH), with just over 6% returns year to date.

Both ETFs track the MSCI Europe Healthcare index, which is full of a greater number of large, established and mature companies. Its largest weighting is also to pharmaceuticals.

Interestingly, the fourth best-performing ETF is the Xtrackers MSCI USA Health Care ETF GBP (LSE:XSHC), with returns of 11.8%. That’s noticeably higher than the other US healthcare ETFs, both of which track US healthcare indices constructed by S&P Dow Jones Indices. Still, both outperformed the European healthcare ETFs, likely the result of US healthcare having more tech exposure.

This dispersion in returns for healthcare-focused ETFs should serve as a helpful reminder to investors using thematic or sector ETFs. One sector can often encompass a wide variety of companies and returns can often be driven just as much by this as the specific sector the ETF offers exposure to.

Varied performance among healthcare-related ETFs 

ETF Year-to-date returns (11 November)
L&G Healthcare Breakthrough ETF 44.8%
iShares Healthcare Innovation ETF 36.3%
HAN-GINS Indxx Healthcare Innovt ETF 20.7%
Xtrackers MSCI USA Health Care ETF 11.8%
Xtrackers MSCI World Health Care ETF 10.8%
SPDR MSCI World Health Care ETF 10.7%
Lyxor MSCI World Health Care ETF 10.7%
Invesco Health Care S&P US Select Scope ETF 10.6%
iShares S&P 500 Health Care Sector ETF 10.6%
SPDR MSCI Europe Health Care ETF 6.4%
Amundi MSCI Europe Healthcare ETF  6.3%

Source: FE Analytics 

These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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