It’s been an eventful first seven months of 2020 for healthcare ETFs. With innovation and the coronavirus fight at the forefront of the sector discussion, the Principal Healthcare Innovators Index ETF (Nasdaq: BTEC) is emerging as a leader in a new breed of healthcare ETFs.
BTEC tracks the Nasdaq U.S. Healthcare Innovators Index, which is designed to provide exposure to 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.
Of course, vanquishing the virus is priority number one in the healthcare space, but long-term investors should assess other factors, and that basis, the stars align nicely for BTEC.
“We project 4.7% annual average sales growth through 2024 (similar to consensus) for the 18 moatiest pharma and biotech names we cover, as innovation more than counters generic/biosimilar and branded competitive threats,” said Morningstar analyst Damien Conover in a recent note. “Overlaying our growth analysis with valuation, we see underappreciated areas.”
BTEC’s Bright Future
Since the coronavirus outbreak, health care technology has come to the fore with various innovations to combat the virus. This can only help fuel health care technology exchange-traded funds (ETFs) moving forward from preventative medicine to treatment.
“Innovation is the central building block for the strong economic moats in the drug and biotechnology industry, supporting drug pricing power and launch trajectories,” notes Conover. “However, drug sales fall significantly following patent expirations, making the continuous cycle of new drugs essential to the industry’s economic moats.”
As individuals have been sheltered-in-place over the past several months due to the ongoing coronavirus pandemic, they have been compelled or even obligated to postpone elective medical procedures so that priority can be placed on helping patients Covid-19.
Looking ahead, healthcare companies are projected to generate annual earnings of 9% and revenue growth of 14%, the highest of all sectors in the S&P 500, according to FactSet data. What makes BTEC a compelling long-term bet is that it’s not dependent on pharmaceuticals makers and its components from that group aren’t one-trick ponies.
“A high dependence on one drug tends to weaken a company’s moat; competitive threats, an emergence of an unknown side effect, or a patent loss can impair the cash flows from the drug, hurting the company’s ability to reinvest in developing the next generation of drugs,” notes Conover.
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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.