While still sporting a modest year-to-date loss, the S&P 500 Health Care Index is higher by 4.44% over the past month, and with the healthcare sector’s reputation for defensive and quality traits, it could be a refuge for market participants if broader market volatility creeps higher.
Plus, there’s value to be had in the sector, potentially increasing the allure of exchange traded funds such as the Invesco S&P 500® Equal Weight Health Care ETF (RYH). Speaking of value, RYH is proving the value of equal-weight as it pertains to healthcare stocks. The Invesco ETF is higher by 3.16% year-to-date while the cap-weighted S&P 500 Health Care Index is lower by almost 2%.
As an equal-weight ETF, RYH offers investors the diversification they’d expect with such a strategy. For example, none of the fund’s 66 holdings exceed a weight of 1.89%. That diversification makes RYH a potentially pertinent choice for investors seeking a broad-based play on some of the best healthcare equities — a theme recently highlighted by Morningstar.
Blue-chip pharmaceuticals companies Dow component Johnson & Johnson (JNJ) and Pfizer (PFE) are among the names on that list. Both are RYH components.
J&J sports an attractive wide moat, which “supported by intellectual property in the drug group … and strong brand power from the consumer group. Despite carrying some lower-margin divisions, J&J maintains strong pricing power and has posted gross margins above 70% during the past four years, validating its strong competitive position,” noted Morningstar analyst Damien Conover.
Of note is the fact that RYH allocates nearly a third of its weight to medical device manufacturers, giving the ETF a different industry profile than its biotech/pharma-heavy cap-weighted rivals. That’s worth mentioning because the medical device industry is littered with wide moat firms, including several that are RYH holdings.
“Medical devices, for their part, have high switching costs because surgeons develop expertise in using a differentiated set of tools and device systems have component parts that are designed to work together,” according to Morningstar.
RYH member firms Zimmer Biomet Holdings (ZBH) and Thermo Fisher Scientific (TMO) are examples of medical device companies with switching cost advantages. In other words, yes, these companies have competitors, but it can be costly and time-consuming for hospitals to leave these companies for rivals.
Nearly all RYH components sport intangible assets advantages, while others combine that traits with pure-cost and switching-cost advantages.
For more news, information, and analysis, visit the Portfolio Strategies Channel.
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.