Another Way to Harness Healthcare Growth
Often viewed as a defensive sector due to its large exposure to blue chip pharmaceuticals companies and large-cap insurance firms, healthcare offers much more growth and innovation than novice investors may realize.
Predictably, many investors associate those opportunities with biotechnology and the related equities, but there's more to the story. Actually, healthcare innovation is far from limited to drugs and therapies. Much of that innovation is being sourced by devices and machines, just as it is in the traditional technology arena, making medical devices a compelling segment for investors.
A scant number of exchange traded funds provided dedicated medical devices exposure, but there's a new option to consider thanks to the First Trust Indxx Medical Devices ETF (MDEV).
MDEV, which debuted just over a week ago, is the latest example of a rookie ETF addressing a fast-growing segment of the healthcare sector, and one that's often underrepresented in the broad, old guard funds targeting the sector.
Post-COVID opportunity with MDEV
As is the case segments such as telemedicine, the medical device industry was on an impressive growth trajectory prior to the coronavirus pandemic and prior to the race to a vaccine. Device makers were in the spotlight due to surging demand for diagnostic and testing equipment. For investors, the good news is that the case for MDEV won't evaporate even if COVID-19 is completely eradicated tomorrow.
“The health care industry is undergoing fundamental transformations as a shift toward an aging population, prevalence of chronic diseases and advances in innovative technologies continue to increase health care demand and expenditures, particularly in the wake of the COVID-19 pandemic,” according to First Trust research. “There may be continued demand for diagnostic instruments, interventional devices, general laboratory equipment and medical supplies such as gloves, syringes, and masks as the health care industry continues to grow and evolve.”
Indeed, data confirm that as an industry, medical devices is an appropriate idea for investors seeking growth. BCC Research estimates this will be an almost $644 billion industry this year before vaulting to nearly $797 billion in 2025.
There's more. As First Trust points out, the global market for surgical robots is expected to sport a compound annual growth rate (CAGR) of 11.52% from 2020 through 2027, while the 2021 through 2028 CAGR for smart medical devices is estimated to be 20.1%.
“The portable medical devices market size is expected to surpass around $85.1 billion by 2027, growing at a CAGR of 11.35%,” according to Precedence Research.
MDEV methodology matters
MDEV holds 50 stocks, none of which exceed weights of 2.72%. That's an important trait because a traditional passive fund approach to medical device equities would likely be cap weighting, potentially exposing investors to single stock risk.
The new ETF also features liquidity and minimum market capitalization requirements, ensuring thinly traded, tiny and perhaps financially dubious stocks don't make it onto the roster. There's also something of a purity requirement.
“Eligible securities from medical device companies that derive a minimum of 50% of their total revenue from business activities associated with medical equipment are ranked based upon their market capitalization,” notes First Trust.
Bottom line: MDEV merits consideration due to the stellar growth prospects offered by the medical device industry, indicating investors may not want to focus on the fund's rookie status.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.