As the coronavirus outbreak continues to grow, countries are becoming even more dependent on their healthcare and the technological developments within it for the necessary machinery to fight against the spread of the disease.
Companies within the healthcare sector are in high demand for a vaccine to fight against the coronavirus which has taken nearly 40,000 lives worldwide by the end of March.
Some examples of shifts in companies' business plans include Johnson & Johnson announced it is looking to introduce human testing for potential COVID-19 vaccines by September. In the US, Ford Motor has partnered with General Electric’s healthcare division to produce 50,000 ventilators over the next three months.
In tandem with the pandemic growing, the global financial market has wiped out gains made over the last two years. But as and when markets start to rebound, the healthcare is showing promising growth potential.
iShares Healthcare Innovation UCITS ETF (HEAL)
Xtrackers MSCI World Health Care UCITS ETF (XDWH)
iStoxx FactSet Breakthrough Healthcare index
MSCI World Health Care Net Total Return index
Total expense ratio
Tracking the iStoxx Factset Breakthrough Healthcare index, HEAL is comprised of 130 constituents which are within the healthcare sector from both emerging and developed markets.
It seeks to include companies that are focused on innovation within global healthcare and will likely benefit from social changes and the increased application of technology.
While it is global, its US exposure accounts for 65.9% of the fund with the next largest geographies being South Korea and Japan with 9.8% and 5.9%, respectively.
Despite the US accounting for a large part of HEAL, its largest holding is Seegene, a South Korean screening and diagnostic product provider for cancer, sepsis and viruses. Seegene has a 3.7% weighting in the fund, ahead of RA Pharmaceuticals and Momenta Pharmaceuticals with 2.1% each.
While the S&P 500 index has seen its one-year return fall to -8.4% at the end of March, the previously mentioned healthcare stocks have been flourishing. Seegene’s one-year return was 409%, RA Pharmaceuticals’ was 111.3% and Momenta Pharmaceuticals’ was 97.8%.
XDWH tracks the MSCI World Health Care index similarly includes companies that are focused on the innovation within healthcare, however, it only includes companies from developed markets. It is largest geography exposure again is the US with 65.1% of the fund, but as it only includes companies from developed markets, its next largest exposures are Switzerland with 9.3% and Japan with 6.6%.
With 156 constituents, XDWH’s largest holding is Johnson & Johnson with 6.9% ahead of United Health Group with 4.7% and Roche GS with 4.4%.
Another key difference between the two funds is the regularity of their rebalances. HEAL is rebalanced annually whereas XDWH is done every quarter.
Cost and tradability
The time of the launches for HEAL and XDWH were only six months apart, however, the fee difference is relatively significant. XDWH comes with a total expense ratio (TER) of 0.3%, 10bps cheaper than HEAL at 0.4% but this will most likely be due to its emerging markets exposure.
When it comes to tradability, XDWH has greater assets under management at $525m ahead of HEAL’s $460m, suggesting slightly better liquidity, although nothing too significant.
According to Bloomberg, amid the coronavirus pandemic, XDWH has managed to maintain a premium of roughly 0.09% whereas HEAL has been traded at a discount of 0.97%, nearly 1% less than its one-year average.
The healthcare sector performed significantly well in Q4 2019 but started to plateau when the coronavirus, which started in China, took effect internationally.
In Q4, HEAL’s net asset value (NAV) climbed 17.8% ahead of XDWH with 13.5% but when the tide took a turn in the new year, both ETFs were impacted heavily.
In Q1 2020, HEAL’s performance fell 11%, just below XDWH with 10.8%. Those three months mean HEAL’s year-to-date performance slumped to -10.8% while XDWH managed to stay positive at 0.6%.
As the pandemic continues and the world depends even more on the healthcare sector, ETFs with this exposure will likely rebound with potentially the biggest leaps. Using Seegene and South Korea as an example, the country implemented mass testing to isolate the spread of the disease and has seen Seegen’s share price rise 400% in 12 months.
This has had positive results for South Korea and has seen other countries around the world attempting to ramp-up their test-kit production in tandem with ventilators and attempting to find a vaccine.
From an investment perspective, there are a handful of differences between HEAL and XDWH such as emerging market coverage, fees, bid-ask spreads and rebalancing frequency.
In terms of cost-efficiency, XDWH benefits from having the greater AUM, lower fee and potential to trade at a premium even during volatile periods which makes it favourable.
Because of HEAL’s emerging market exposure, it comes with a higher fee and trading at a discount suggesting it is the riskier option amid the current volatile conditions.
While past performance is no indication for future potential for absolute return, XDWH has managed to maintain a positive performance over the last three months when some investors have lost a lot of value.
With all these factors in mind, DWS’s XDWH appears to be the more promising option being cheaper and performing positively in both volatile and stable periods, however, if your portfolio has little emerging markets exposure then HEAL could be your bet.
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