In what has been a tough year in some parts of the healthcare sector, the iShares U.S. Medical Devices ETF (NYSEArca: IHI), the largest dedicated medical devices exchange traded fund, is standing out with a year-to-date gain of more than 18%.
Industry observers argue that medical technology companies can tap into increased healthcare spending among emerging economies while the U.S. market has matured and could experience slower growth. Looking ahead, in the years through 2024, spending growth is projected to average 5.8% and peak at 6.3% in 2020.
SEE MORE: A Checkup With the Medical Device ETF
IHI has also seen plenty of mergers and acquisitions activity among its components in recent years, but that trend within the health care sector has come under scrutiny as the U.S. Treasury Department looks to crack down on U.S. firms acquiring rivals with foreign domiciles so that they can avoid paying U.S. taxes. More recently, inversions have occurred after large U.S. companies merged with smaller foreign firms. The U.S. company would reincorporate in a tax-friendlier country, like Ireland, while maintaining much of their core operations in the U.S.[related_stories]
“Of 47 stocks in the ETF, Medtronic (MDT) is the largest holding, with more than 12% of the portfolio. Shares have climbed as much as 12% from the 79.60 buy point of a breakout in April,” reports Investor’s Business Daily. “The stock has performed decently despite the fact that earnings have been basically flat for five quarters. The outlook is improving, though: Analysts expect profit to rise 7% in the fiscal year ending in April and 11% the next year. At its investor day in June, Medtronic forecast mid-single-digit revenue growth as it develops its product pipeline and draws on its diversified markets.”
For healthcare ETFs, the good news is that the U.S. economy moving into the late-cycle phase, overall growth may slow and signs of an economic slowdown could pop up. Consequently, investors may also turn to defensive sectors that are less economically sensitive, such as health care.
SEE MORE: Healthcare ETFs Ready to Rally
“Other key contributors to iShares U.S. Medical Devices are Thermo Fisher Scientific (TMO), which makes equipment for medical research, and Zimmer Biomet (ZBH), which just posted its strongest quarter of sales growth in nearly a decade. Becton Dickinson (BDX) had been trending higher, but fell sharply Thursday after it cut its full-year sales forecast, citing currency headwinds,” according to IBD.
For more information on Healthcare ETFs, visit our Healthcare category.
iShares U.S. Medical Devices ETF
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.