Healthcare has obviously been one of the main talking points of 2020 so far. Is the iShares Global Healthcare ETF (ASX: IXJ) one of the best ASX sector ETFs?
Sector ETFs
Sector ETFs focus on one of the Global Industry Classification Standard (GICS) sectors.
There are 11 GICS sectors and many smaller industries and sub-industries within these sectors. Some of the sectors include financials, energy, information technology, and healthcare.
Every listed company is categorised into one of the sectors. Therefore, a sector ETF will invest only in companies in a certain category.
iShares Global Healthcare ETF
The iShares Global Healthcare ETF invests in healthcare companies around the world. Around 70% of the ETF is made up of US-based companies, but there is also exposure to Switzerland, Japan, the UK, Denmark, Germany, and others.
The healthcare sector has a number of tailwinds pushing it forward. Globally, we have a growing and ageing population that will start to require greater amounts of care. The sector is also experiencing rapid growth in the use of technology to handle administrative tasks and data analysis which makes the industry more efficient.
The IXJ ETF has a long track record and has delivered growth of 15.97% per year over the last 10 years (although this is not indicative of future performance).
Fees and risks
The IXJ ETF charges a management fee of 0.47% per year. In terms of risks, the most obvious risk is the lack of diversification. While IXJ holds companies across several sub-sectors, they are all within the healthcare sector and will typically demonstrate a high correlation to each other.
Sector ETFs may be more suitable as a ‘satellite’ holding rather than a core holding; a small portion of your overall portfolio which is allocated to high-conviction and high-growth ideas. You can learn more about the core and satellite approach by watching episode 46 of The Australian Finance Podcast:
Another risk is the price of the healthcare companies within the portfolio. Using the iShares S&P 500 ETF (ASX: IVV) as a comparison, IVV has a P/E ratio of 21.9 compared to 26 for IXJ. The healthcare ETF also has a higher price-to-book ratio.
This suggests that, in general, healthcare companies are priced more optimistically than the overall market which could limit future share price growth.
To read more about IXJ, check out our free report here.
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Disclosure: At the time of publishing, Max owns units in the iShares S&P 500 ETF (ASX:IVV).
