Traditional cap-weighted healthcare exchange traded funds typically feature large weights to pharmaceutical and biotechnology stocks.
That’s fine and can serve investors well in the right environments, but healthcare is a diverse sector with multiple contributors beyond biopharma companies. Some old guard healthcare ETFs aren’t adequately levered to that theme, but the Invesco S&P 500® Equal Weight Health Care ETF (RYH) is.
Notably, the $980.8 million RYH allocates over 55% of its weight to healthcare equipment, suppliers, names, and healthcare providers. Those industries could be primed to rebound and generate upside for investors following some rough patches caused by the coronavirus pandemic. Fortunately for investors, RYH’s exposure to those groups is well in excess of what’s found cap-weighted healthcare funds.
“The health care sector’s labor-supply shortage was fueled by the COVID-19 pandemic in two ways, he says. First, when COVID-19 hit, many providers shed workers or encouraged early retirement to rationalize costs in an uncertain economic environment. Second, each COVID-19 wave led to a temporary worker shortage due to government-mandated quarantine periods, in addition to clinician burnout stemming from the need for healthy workers to put in more hours,” according to Fidelity.
While RYH’s exposure to healthcare equipment and suppliers and healthcare providers equities is above-average compared to cap-weighted counterparts, that doesn’t mean the equal-weight ETF is speculative in nature. The average market capitalization of its 65 holdings is $82.42 billion and all of those components are large- and mid-cap stocks.
RYH’s exposure to healthcare insurance providers can also be an inflation-fighting tool for investors because due to rising healthcare costs, those costs are being passed onto companies and their staff.
“Another outcome of the labor shortage—and potentially higher labor costs to attract workers—is an expectation of rising health insurance premiums, as the increased costs to care for patients gets passed on to companies and individuals,” added Fidelity.
RYH is home to managed care providers such as Humana (NYSE: HUM), Dow component UnitedHealth Group (NYSE: UNH) and Centene (NYSE: CNC). Those companies and others can boost pricing on significant percentages of their customer bases on an annual basis, further solidifying the industry’s status as an inflation buffer for investors.
The Invesco ETF also offers investors a compelling valuation opportunity by way of exposure to health care facilities operators, some of which are currently discounted. RYH member firms that fit that bill include HCA Healthcare (NYSE: HCA).
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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.