The health care sector is leading the market this year, outpacing the broad market by a wide margin. The bullishness can be felt in almost every corner of the health care space such as biotechnology, pharmaceuticals and service providers (read: 2 Great Healthcare ETFs in Focus).
While most investors are focusing on these corners for strong gains, many are overlooking the relatively obscure medical device and equipment sector. This segment has also been a solid performer and could be an interesting addition to ones health care portfolio.
This could be a solid year for the medical device sector with increased mergers and acquisitions paving pay for stronger business and diverse offerings. Several MedTech majors with struggling core businesses are looking to explore potential therapies through collaborations and alliances.
Expansion in emerging markets also represents one of the best ways for growth in 2013 and beyond, especially given the saturation in the developed markets of US, Europe and Japan (read: Emerging Market ETFs Tumble on Global Worries).
Brazil, Russia, India and China (collectively known as the BRICs) are seeing increasing demand for the devices given the aging population, increasing wealth, government focus on health care infrastructure and expansion of medical insurance coverage.
Further, product launches, better pipeline visibility and appropriate utilization of cash should increase confidence in the medical device sector.
Challenging economic conditions, a competitive environment, pricing pressure, regulatory overhang and a larger-than-expected currency headwind continue to be the major threats for several medical device players (read: 3 Impressive Biotech ETFs Crushing the Market).
In addition, uncertainties with regard to Obamacare treatment and concerns over sluggish earnings results could weigh on the growth prospects of the medical device space.
Medical Device ETFs in Focus
For those looking to play in the space, there are two focused ETFs that can offer excellent exposure to the medical device and equipment market. While the two may appear similar at first glance and hold many of the same companies, there are actually some key differences between them, which we have highlighted below:
iShares U.S. Medical Devices Fund (IHI)
The fund tracks the Dow Jones U.S. Select Medical Equipment Index and holds 39 stocks in its basket. It is a less liquid and less popular ETF in the health & biotech space with AUM of $470 million and average trading volume of around 50,000 shares.
The product is somewhat concentrated in the top 10 holdings, as it has more than 62% of the assets in them. Medtronic (MDT), Thermo Fisher (TMO) and Covidien (COV) take the top three spots in the basket with a combined share of around 27%. The fund has a nice mix of all cap securities with 55% weighting going toward large caps, 17% toward mid caps, and the rest toward small/micro caps.
The ETF has added about 29.5% year-to-date while charging investors 45 basis points a year in fees (read: Medtronic Earnings Push Medical Device ETF Higher). IHI currently has a Zacks ETF Rank of 3 or ‘Hold’ rating with a ‘Medium’ risk outlook.
SPDR S&P Health Care Equipment ETF (XHE)
The fund seeks to match the performance of the S&P Health Care Equipment Select Industry Index. It charges investors 35 basis points a year in fees and holds 58 securities in total. Also, the ETF failed to attract investor interest having amassed just $25 million in AUM since its launch in Jan 2011 and trading in volume of only 1,600 shares per day (see more in the Zacks ETF Center).
In terms of holdings, Align Technology (ALGN), HeartWare International (HTWR) and Insulet (PODD) take the top three spots, although the equal weighting scheme ensures that no one company dominates the fund.
In terms of industry exposure, health care equipment makes up for four-fifths of the fund while another one-fifth goes to health care supplies. The fund focuses more on small caps as these account for 52% of XHE while mid and large caps take the remaining portion in the basket.
The product has gained over 28.6% so far this year and has a Zacks ETF Rank of 3 or ‘Hold’ rating with a ‘Low’ risk outlook.
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