Generating Wealth Through Health: Cure Your Portfolio Woes with BMO’s New Enhanced Income Health Care ETF (ZWHC)Feb. 14, 2023
Like other Western nations, the United States is getting older, which means an increasing amount of financial resources will require being spent on health care as demand for those products and services inexorably rises. ZWHC provides exposure to American-listed healthcare companies, while delivering consistent income distribution through dividends and covered-call writing.
- Exposure to a basket of American health care companies
- Covered call overlay implementation for income generation, writing short-dated out-of-the-money call options on approximately half of the portfolio
- Targeted Distribution Yield = ~5.0%-5.5%1
- Distribution Frequency: Monthly
- Risk rating: Medium
- Management Fee: 0.65%
Trade idea – Going Long on Health
In 2022, the S&P 500 Health Care Index outperformed the broad market by ~16% (USD). This outperformance can be attributed to pharmaceutical, biotech companies and health insurers, while the underperformers were medical device companies and life-science device companies. Given, this strong outperformance in 2022, how does 2023 look for the sector?
In our view, a more a cautious approach is a healthy choice. Gaining exposure in a more risk-controlled manner through the BMO Covered Call Health Care ETF (ticker: ZWHC) provides investors with a diversified basket of stocks, combined with a monthly distribution of income to buffer against market volatility. From a longer-term macro perspective, there are two major tailwinds within the space: demographics and continued innovation. ZWHC is built to benefit from both trends by holding U.S. health care companies that will be direct beneficiaries of the inevitable increase in demand for healthcare services as the population ages and life expectancies continue to increase. To underscore this point, look no further than demographic projections that suggest about a quarter of Americans will be 65 or older within a few decades.
Projections of the older adult population, 2020 to 2060
By 2060, nearly one in four American’s is projected to be an older adult.
Source: U.S. Census Bureau, 2017 National Population Projections.
Within the broader health care complex, there are multiple attractive sub-sectors that ZWHC provides exposure to. The healthcare equipment group is one: these companies are predicted to be attractive opportunities, as commodity prices, shipping costs, and hospital staffing levels improve, , causing an increase in demand for their products and subsequently higher revenue growth. Another sub-industry poised to benefit from the secular growth tailwinds now forming are pharmaceutical and biotech companies that are innovating in the fields of oncology and diabetes/obesity. Projected revenue generated from oncological products and services is estimated to more than double 2020 levels by the end of the decade. A similar estimate is also anticipated for diabetic products.
The BMO Covered Call Health Care ETF has approximately 65% of its holdings weighted toward these sub-industries.2
Oncology market size, 2020 to 2030 (USD, $billions)
Source: Precedence Research, October 2022.
Type 2 Diabetes market size, 2020 to 2030 (USD billion)
Source: Precedence Research, April 2022.
ZWHC provides Canadians with a new investment tool with exposure to the U.S. health care sector. It also presents a new income option within a sector that had previously been bereft of such an opportunity. Finally, the health care sector tends to be more defensive during times of stress in the economy. One of the main reasons is due to government spending in programs such as Medicare, which continues regardless of economic conditions. Hence, if we enter into a recession, the sector can be viewed as providing defensibility within a broader portfolio.
|BMO Covered Call Health Care ETF|
|Health Care Equipment||26.5%|
|Life Sciences Tools & Service||12.8%|
|Managed Health Care||9.0%|
|Health Care Services||8.7%|
|Health Care Facilities||4.3%|
|ZIMMER BIOMET HOLDINGS IN||4.50%|
|BAXTER INTERNATIONAL INC||4.50%|
|UNITEDHEALTH GROUP INC||4.47%|
|BECTON DICKINSON AND CO||4.43%|
|QUEST DIAGNOSTICS INC||4.39%|
|BRISTOL-MYERS SQUIBB CO||4.38%|
|HCA HEALTHCARE INC||4.29%|
|GILEAD SCIENCES INC||4.27%|
|THERMO FISHER SCIENTIFIC||4.24%|
|AGILENT TECHNOLOGIES INC||4.22%|
|MERCK & CO. INC.||4.18%|
|ELI LILLY & CO||4.16%|
|JOHNSON & JOHNSON||4.10%|
Source: Bloomberg, BMO Global Asset Management, as of February 6, 2023. Individual holdings are round up to 2 decimal points. The portfolio holdings are subject to change without notice and only represent a small percentage of portfolio holdings. They are not recommendations to buy or sell any particular security.
Outlook To summarize, advanced economies are ageing and as those populations grow older, they will inevitably require higher levels of spending on health care products and services. ZWHC gives Canadian investors direct exposure to the largest health care sector of any advanced economy in the world, with a focus on allocating assets toward subsectors well-positioned to benefit from increasing revenue growth and profitability. Further, this ETF provides attractive income generation through BMO’s Covered Call strategy, while being less sensitive to the economic cycle via support through governmental expenditures.
1 Bloomberg, BMO Global Asset Management, as of February 6, 2023. Estimated Distribution Yield was calculated by using the expected annualized distribution yield (which may be based on income, dividends, and option premiums as applicable) of the underlying portfolio and excluding any capital gains from portfolio turnover, less expenses. The distribution rate is based on the starting NAV of $30. Distribution yield is not an indicator of overall performance and will change based on market conditions, NAV fluctuations, and is not guaranteed.
2 Bloomberg, BMO Global Asset Management, as of February 6, 2023.
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