Healthcare is 2018’s top performing sector with a 15 percent return year-to-date, handily beating the broader market’s gain of 4 percent.
But what’s done even better? Medical devices.
There are two medical-device exchange-traded funds: the iShares U.S. Medical Devices ETF (IHI) and SPDR S&P Health Care Equipment ETF (XHE). They’re up 24 percent and 20 percent year-to-date, respectively.
Chris Dhanraj, the head of iShares investment strategy, points to some key factors behind the gains in both the overall healthcare sector and the medical devices subsector.
The first pertains to demographics, which is fueled by aging baby boomers joining Medicare's ranks to the tune of about 10,000 a day. Indeed, Medicare spending is around 20 percent, or roughly $650 billion, of total healthcare spending
Another factor relates to a more-relaxed regulatory environment. Dhanraj notes that the Food and Drug Administration this week proposed new guidelines to overhaul how device makers bring their products to market, known as 510(k) clearance. He says this should streamline the regulatory backdrop and help sustain innovation, although it will likely need congressional approval.
“This is another example of regulatory hurdles being lowered, which in turn should helps sustain the commercialization of new innovations,” he says.
Medical devices cover a variety of products from implants to surgical robots. Dhanraj says the segment has benefitted from last year’s tax overhaul. In addition, technological advances in computational biology, bioinformatics, robotics and artificial intelligence are bringing down development costs.
Not surprisingly, the two medical-device ETFs share some characteristics. Namely, they’re domestic funds with a heavy focus on medical equipment and supplies, and often hold the same companies. To that point, they have 52 overlapping constituents and their portfolios overlap 45 percent by weight, according to ETF Research Center.
IHI is the older and bigger of the two funds. It’s a market-cap weighted product with 58 holdings and $3 billion in assets under management. Its expense ratio is 43 basis points. Nearly half of the fund focuses on firms in the medical equipment, supplies and distribution side of the business. Advanced medical equipment and technology comprise another 40 percent, while pharmaceuticals round out the top three sectors. It tracks the DJ US Select Medical Equipment Index.