Healthcare companies around the world have ageing population tailwinds and intellectual property competitive advantages pushing their growth. The BetaShares Global Healthcare ETF (ASX: DRUG) wants to capitalise on that. Here’s what you need to know about this healthcare ETF.
Exchange-traded funds, or ETFs, are investment funds that are listed on a securities exchange and provide exposure to a range of shares or assets with a single purchase. ETFs can be ‘managed funds’ or ‘index funds’, or in other words, active or passive.
The Australian Finance Podcast episode below explains ETFs, index funds and managed funds in more detail:
Unpacking The BetaShares DRUG ETF
The aptly named BetaShares DRUG ETF is a passive ETF that is designed to track the performance of the Nasdaq Global ex-Australia Healthcare Hedged AUD Index.
The DRUG ETF aims to do this by investing in around 60 healthcare companies based in nine countries throughout the US, Europe and Asia.
Although investors may not be familiar with a lot of these companies, there are some standout names like Johnson & Johnson (NYSE: JNJ), Pfizer Inc. (NYSE: PFE), and GlaxoSmithKline plc (NYSE: GSK).
Most of the portfolio holdings in the DRUG ETF are based in the US (66%), while the second and third largest allocations are to Switzerland (12%) and Britain (6%) respectively. The ETF also has exposure to countries like Japan, France, Denmark and Germany.
The portfolio is hedged to Australian dollars, which is done to try to reduce the effect of currency fluctuations where possible.
With tailwinds like ageing populations around the world and the competitive advantages many healthcare companies possess (due to intellectual property such as patents and FDA approvals), an investor might expect high growth in this sector.
However, the DRUG ETF has seen mild growth over the last few years, returning 8.57% per year over the last three years but falling by 2.21% in the last 12 months. The DRUG ETF was, for a time, offering a dividend yield above 3.5% but that came crashing down when the ETF failed to pay a dividend in July this year.
Fees & Risks
The DRUG ETF charges a management fee of 0.57%, which is on the higher side for a passive ETF.
Although the ETF benefits from global diversification, it is of course concentrated to one particular sector, which is always a risk. It’s also important to not assume that currency hedging takes out all exchange rate risk. Hedging rarely, if ever, removes all of the risks of global investing and currency fluctuations, and instead simply reduces it.
The healthcare industry certainly has some appealing companies, especially in Australia. Companies like CSL Limited (ASX: CSL), Ramsay Health Care Limited (ASX: RHC), and Cochlear Limited (ASX: COH) all come to mind.
However, when you put a lot of healthcare companies into a passive portfolio, you’re just about guaranteed to get some not-so-good companies that can experience steep losses if, for example, they fail a clinical trial or are rejected a drug approval.
Healthcare companies can make excellent investments, but the sector as a whole has shown lacklustre performance over the last few years. With low returns and a high management fee, this wouldn’t be my ideal ETF.
I’d rather invest in our number one ETF pick profiled in the free report below.
Disclosure: At the time of writing, Max has no financial interest in any of the companies mentioned.