IXJ: Potential To Generate Steady Price Growth Over The Long Run

~ by Snehasish Chaudhuri, MBA (Finance).

iShares Global Healthcare ETF (NYSEARCA:IXJ) is an exchange-traded fund, or ETF, that invests primarily in three segments of the healthcare sector – healthcare equipment & services, biotechnology & life sciences and pharmaceutical. During my last coverage in March 2022, I found that IXJ’s price performance between 2015 and 2018 had been poor. I assumed that might have led BlackRock management to reshuffle its portfolio. In the first three years since reshuffling, the return had been quite good.

Despite exposing itself to pharmaceutical and biotechnology stocks, IXJ remained steady during the pandemic period. But again, returns during the first 10 weeks of 2022 was negative 7.28 percent. 16 months since my last coverage, I’d like to reassess IXJ’s performance, and conclude on the effectiveness of portfolio reshuffling carried on 4 years back.

IXJ’s Major Investments Have Been Static Since The Reshuffling 4 Years Back

iShares Global Healthcare ETF fund benchmarks its performance against that of S&P Global 1200 Health Care Index and uses representative sampling techniques in order to create its portfolio. This index measures performance of companies that are believed to be important players in global markets. Thus, IXJ’s portfolio is boosted with large-cap healthcare stocks. However, IXJ has been static with its major investments since a major portfolio reshuffling four years back. Not surprisingly, IXJ has a turnover ratio of only 4 percent.

IXJ’s portfolio consists of stocks mostly of U.S. based healthcare companies, as 72 percent of the ETF is made of American stocks. Innovation-led U.S. culture has led to a huge number of world’s drug companies to establish their bases in that country. Remaining portion of IXJ’s portfolio is focused in Western Europe and Japan. Both these regions have rich biotechnology cultures. Due to this, the portfolio of iShares Global Healthcare ETF enables a full global selection of companies, without being much tied to the S&P 500 (SP500).

Overall, IXJ’s Major Investments Had Mixed Performance Over The Long Run

During my last coverage 17 stocks held 55 percent of its portfolio. Those 17 stocks are still the top investments of IXJ and account for almost 56 percent. This is interesting, because since the covid-19 pandemic, stocks from biotechnology and pharmaceutical sectors haven’t perform that well. A detailed price analysis of these 17 stocks thus may provide an indication about what kind of returns investors should expect from IXJ over the long run.

Thermo Fisher Scientific Inc. (TMO), Medtronic plc (MDT), Danaher Corp. (DHR), Abbott Laboratories (ABT) and UnitedHealth Group Inc. (UNH) – these five stocks from healthcare equipment and services were expected to drive the growth of IXJ’s portfolio. Unfortunately, all these stocks had negative price growth during the past 12 months. Not surprisingly, IXJ posted a price growth of only 0.6 percent. However, over the last five years, ABT, UNH, DHR, and TMO registered price hikes of 70 percent, 79 percent, 136 percent and 145 percent, respectively. IXJ’s price rose by more than 40 percent during the same period. AbbVie Inc. (ABBV) and Amgen Inc. (AMGN) – these two biotechnology stocks were neither productive during the past 1 year, nor over the past five years.

The remaining 10 stocks belonged to large pharmaceutical firms – Eli Lilly and Company (LLY), Merck & Co., Inc. (MRK), Sanofi (SNY) and AstraZeneca PLC (AZN) – were the four stocks that performed exceptionally well. During the past 12 months, when even the healthcare equipment stocks failed to generate growth, these pharma stocks stood out. Over the past five years also, these four stocks matched the performance of healthcare equipment stocks. LLY’s price rose more than 4 times. Johnson & Johnson (JNJ), Bristol-Myers Squibb Company (BMY), Pfizer Inc. (PFE), Novartis AG (NOVN) Novo Nordisk A/S (NVO), and Roche Holding AG (OTCQX:RHHBY) however had disappointing performance similar to biotechnology stocks. Overall, IXJ’s major investments had a mixed performance, which failed to lure the investors. At the same time, the return over the long-term is enough to retain growth-seeking investors.

Low Volatility Portfolio Of Mega-Caps Is A Smart Choice For Long-Term Hold

With a 24-month beta of 0.65 and 60-month beta of 0.67, iShares Global Healthcare ETF is a relatively low-volatility ETF. This lack of volatility is helpful when the market is highly uncertain, like it is at present. The recent uptick in prices of pharmaceutical stock is a reflection of this. Also, there is a growing trend of investors preferring healthcare stocks over higher return generating technology stocks, purely due to such high volatility. As economic data continues to worsen and fears of recession grow, money will continue to flow to the safer sectors, demand for which will always grow on a steady basis.

IXJ is currently trading at price to earnings (P/E) ratio of 17.7, which is a slight premium to the market. IXJ is also trading at a marginal discount to its NAV. The premium is explained by the high quality of the revenue and earnings, consisting mostly of large-caps. iShares Global Healthcare ETF itself possesses a massive asset under management of $3.8 billion. Large-caps continue to outperform small-caps, which suffered due to their weaker profit margins and unstable earnings outlooks in this high interest rate environment.

Investment Thesis

2023 is going to be an uncertain year for investors. So, many investors will opt for stocks from safer sectors like healthcare until a better and certain macroeconomic environment starts prevailing. As the population of most of the wealthy countries continues to age, the healthcare sector is going to benefit, no matter what kind of economic conditions prevails in future. IXJ works well for most retiree portfolios and also provides a great option for growth.

While other options like a utilities or financials global ETF are interesting, healthcare provides the best balance of valuation and growth over a longer time horizon. iShares Global Healthcare ETF thus remains a strong choice for long-term hold assuming those healthcare equipment and pharmaceutical stocks continue to generate strong returns over the long run.