An exchange traded fund that tracks healthcare and technology themes can help diversify and enhance investment portfolios.
In the recent webcast, Investing for tomorrow, today: Exploring the future of health care, Matthew Cohen, Head of ETF Specialist Team, Principal Global Investors, underscored persisting demand for innovation that will keep producing results for investors over the long haul. For example, overarching themes like an aging population, a growing health economy, and the fight against chronic and rare illnesses will continue to fuel demand for innovative healthcare services.
About 10,000 people per day will turn 65 through fiscal year 2030. From the fiscal year 2018 through 2022, global healthcare spending is expected to increase at a compound annual growth rate of 5.4%, compared to a 2.1% projected global GDP. Meanwhile, the cost of care for those with chronic conditions today has increased to $1.1 trillion, or 10x more expensive than non-chronic patients. Additionally, over 7,000 rare genetic diseases have been identified, with less than 5% benefitting from an FDA-approved treatment process.
Steve Jones, Client Portfolio Manager, Principal Global Systematic Solutions, highlighted the growing health needs of an aging population, especially with improved healthcare services that have extended the life expectancy of the global population. In the early 1900’s, many were lucky if they lived until their mid-30’s. Today, looking across the world, the average lifespan is 72 years old. While Millennials are shaping many industries, the senior citizen crowd rules the roost in healthcare. Looking ahead, the number of Americans over the age of 65 is expected to nearly double to 72.1 million by 2030.
Improving technologies and a better quality of life have caused some to say we are living healthier than ever, but Jones cautioned that it’s a tug of war between less of the “bad” and more sedentary lifestyles. Evidence of healthier choices like less smoking and more exercise have been offset by sedentary lifestyles in the United States and many wealthy nations.
Jones also noted that wealthy nations continue to spend a lot on healthcare. Healthcare is expensive, but some may not be aware just how much more expensive it is in the United States than abroad. While it may signal inefficiency, it also signals a willingness and ability to pay, particularly domestically.
Jeffrey Schwarte, Portfolio Manager and Head of Systematic Solutions, Principal Global Systematic Solutions, argued that a broad fund product that holds multiple biotech names is be a better way for investors to capture positive outcomes through the FDA approval process. Not all new drugs are approved, so a wide net can help investors better-capture potential breakthroughs. For example, only 63% of new drugs pass through the Phase I to II trials, 30.7% of those pass through the Phase II and III trials, 58% of those pass through the Phase III to NDA/BLA process, and 85% go through NDA/BLA to approval. Overall, only 9.6% of new drugs can successfully go from Phase I to FDA approval.
“Given unpredictable, high rates of clinical trial failure, a broad-based, basket approach can reduce downside risk while potentially capturing upside alpha,” Schwarte said.
Consequently, investors can look to assets like the Principal Healthcare Innovators Index ETF (Nasdaq: BTEC) to access early-stage small-capitalization healthcare companies. These are primarily biotechnology and life science, which have the potential to create cures for cancer, develop new medical technologies, or spearhead other medical advances. Additionally, the ETF provides access to specialized healthcare solutions, bringing an efficient, systematic approach to identifying and selecting smaller healthcare companies that many investors neglect.
Financial advisors who are interested in learning more about the future of health care can watch the webcast here on demand.