By Vikram Barhat on April 19, 2023
Estimated reading time: 5 minutes

Investing in the health care sector—better returns than tech?

By Vikram Barhat on April 19, 2023
Estimated reading time: 5 minutes

Are health care stocks the new tech stocks? They could be, in more ways than one. We look at opportunities for equities investors.

A smiling man in a lab coat, in front of three other scientists at a table

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The tech sector has been a favourite of Canadian investors in recent years, thanks to growing global adoption of technology, innovative product offerings, a revenue boom and stock price appreciation—all of which have created a fear of missing out among investors. However, tech stocks have been quite volatile lately, with the tech-heavy NASDAQ index falling a staggering 33% in 2022. Some investors are buying tech stocks while prices are down, but others are looking for opportunities elsewhere—including health care.

Why consider investing in health care?

Starting at the end of the first quarter of 2020, the health care sector captured tailwinds from the global pandemic, which sparked novel medical and technological advancements as governments and drugmakers scrambled to contain the health crisis.

Historically, the health care sector has been less volatile than technology. It’s also poised for long-term growth, underpinned by a global aging population, increased health awareness and greater health care spending in emerging markets such as China and India.

Pharmaceutical companies are developing a wide range of treatments, including targeted therapies for different types of cancer. Healthy annual revenue helps these companies invest in research and development, maintain a busy pipeline of new treatments and make strategic acquisitions.

Their offerings are further boosted by steady advances in health care technology. Digital health technologies, such as electronic health records, telehealth platforms and mobile health apps, have the potential to attract greater investor interest. The digital health market is already projected to grow by $563.59 billion globally from 2023 to 2027, at a rate of 25.8% annually.

Canadian investors may also find it reassuring that health care is one of the few sectors that weather global political and economic uncertainty well. Health care is something everyone needs, irrespective of what’s happening around the world. Therefore, these companies enjoy a certain degree of immunity from economic uncertainty, generating consistent revenue in good times and bad.

Predictable cash flow and revenue make health care firms an appealing choice for investors seeking safety in these uncertain times.

Where to invest in health care?

Investors can choose from a diverse range of businesses in the health care sector, including medical equipment, drug manufacturing, biotechnology, health care providers, life-science tools and services, and medical insurance. Each of these businesses is exposed to the exponential strides that medical science is making in treating diseases such as cancer, multiple sclerosis, diabetes, autoimmune disorders and cardiovascular diseases, among others.

The global health care market is valued in the trillions. In the United States alone, national health expenditures topped USD$4.25 trillion in 2021, according to Peterson-KFF’s Health System Tracker.

Investors can get exposure to this growing sector in a number of ways. One option is to buy individual health care stocks. As with any kind of stock, investors need to do their research on both the sector and the company. A better option for most investors could be to invest in health care exchange-traded funds, or ETFs. These funds hold a basket of health care companies from across the sector.

Investing in health-care ETFs

Healthcare-focused ETFs, such as the Harvest Healthcare Leaders Income ETF (HHL), provide investors with exposure to the growth prospects of the sector, while also mitigating risk through diversification and income generation.

“We see the large-cap health care sector as a source of market leadership in the long term,” said Paul MacDonald, chief investment officer and portfolio manager at Harvest ETFs. “It’s a sector we all need, with growing demand from demographic tailwinds, and companies that innovate new treatments and solutions the whole world benefits from.”

HHL holds the stocks of 20 global large-cap health-care companies, including Pfizer, Merck, Eli Lilly, AbbVie and Johnson & Johnson, among others, that boast innovative health solutions and strong long-term fundamentals. HHL is the largest health care ETF in Canada.

Further, the ETF deploys an active covered-call strategy to produce consistent high-income yield. This approach provides investors attractive monthly income with the opportunity for capital appreciation. In the current environment of economic uncertainty and stock market volatility, investors saving for retirement may want to consider adding such an ETF to their portfolio.

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What is a covered-call writing strategy?

A covered call writing strategy involves selling call options on certain stocks held in the ETF. The investors receive the premiums paid for these options as additional income.

In a call option agreement, the buyer has the option, but not the obligation, to purchase a stock at a specified price (known as the “strike price”) within a specific period of time. The buyer must pay a premium to the seller for this right, and the seller keeps the premium regardless of the outcome.

Call options can offer a number of benefits to investors, including generating higher cash flow and providing downside protection by reducing portfolio volatility.

Using covered calls is also a tax-efficient investment strategy, since cash flow received from writing a call option is considered a capital gain, which is taxed at a lower rate than dividend income from foreign-listed companies, such as the U.S. health care companies held in HHL.

“At Harvest ETFs, we use an active and flexible covered call option writing strategy,” MacDonald adds. “That means we write calls at flexible levels up to our hard 33% limit. Sixty-seven percent of the portfolio is exposed to growth prospects at all times, and when markets are volatile, we can earn the necessary premiums with lower write levels. Our active approach effectively means we can turn market volatility into cash flow. We see that as an attractive quality in any market, but especially amidst periods of heightened volatility.”

Is a health care ETF for you?

Health care-focused ETFs that produce higher income using a covered-call strategy can be attractive to investors who are looking to capitalize on market opportunities and have a certain level of risk tolerance.

These funds provide exposure to a basket of blue-chip health care companies, which could be a better investing approach than owning individual equities. There are also the added benefits of lower fees (compared to those charged by stock-trading platforms) and higher income yield—sought-after portfolio attributes for any investor.

This article is sponsored.

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