Healthcare companies around the world right now have tailwinds and competitive advantages pushing their growth. The BetaShares Global Healthcare ETF (ASX: DRUG) wants to take advantage of that.
What Are ETFs?
Exchange-traded funds, or ETFs, are investment funds that are listed on a stock exchange and provide exposure to a range of shares or assets with one purchase.
This Rask Finance video explains ETFs:
BetaShares DRUG ETF
The aptly named BetaShares DRUG ETF is a passive ETF designed to track the performance of the Nasdaq Global ex-Australia Healthcare Hedged AUD Index.
The ETF achieves this by investing in around 60 healthcare companies based in nine countries throughout the US, Europe and Asia.
While investors may not be familiar with a lot of the companies, there are some standout names like Johnson & Johnson (NYSE: JNJ).
Most of the countries are based in the US (66.2%), while the second and third largest allocations are to Switzerland (12.2%) and Britain (5.9%). The DRUG ETF also has exposure to countries such as Japan, France, Denmark and Germany.
The portfolio is hedged to Australian dollars, which is done to try to eliminate the effect of currency fluctuations where possible.
With tailwinds like an ageing population around the world and the competitive advantages many healthcare companies have (because of things like patents and FDA approvals), an investor might expect high growth in this sector.
However, the DRUG ETF has seen subdued growth over the last few years, returning 8.57% per year over the last three years but falling by 2.21% in the last 12 months. The DRUG ETF was, for a time, offering a dividend yield above 3.5% but that came crashing down when the ETF failed to pay a dividend in July.
Fees And Risks
The DRUG ETF charges a management fee of 0.57%, which is on the high side for a passive ETF.
The ETF benefits from global diversification but it is of course concentrated to one particular sector, which is always a risk. It’s also important to not assume that currency hedging takes out all exchange rate risk. Hedging rarely, if ever, removes all of the risks of global investing and currency fluctuations.
My Take
The healthcare industry certainly has some appealing companies, especially in Australia. Companies like CSL Limited (ASX: CSL) and Cochlear Limited (ASX: COH) come to mind.
However, when you put a lot of healthcare companies into a passive portfolio, you’re just about guaranteed to get some not-so-good companies that can experience steep losses if they are rejected a drug approval or fail a clinical trial, for example. Healthcare companies can make excellent investments, but the sector as a whole has shown lacklustre performance over the last few years. With low returns and a high management fee, this wouldn’t be my ideal ETF.
I’d rather invest in our number one ETF pick in the free report below.
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Disclosure: At the time of writing, Max does not have a financial interest in any of the companies mentioned.
