How Global Demographics Support Healthcare ETFs

The story is the same in most countries: the adults are getting old and the younger generations behind them are much fewer in numbers. 

In some cases, like China, this trend was by design. The one-child policy limited growth for more than thirty years. In most other places, rapid aging was the result of more people moving from farms to urban areas that were less conducive to raising children.

Fewer children means that the portion of the global population made up of older people is growing. In the last ten years the 70+ population grew by 627 million globally. This is an increase from 5% of the total population, to 12% according to data published in the Harvard Business Review.

This might explain why personal healthcare expenditures in the US increased by more than 50% from 2008 to 2018 according to data from the CDC. It’s clear that as the global population enters old age there will be an increasing demand for healthcare services and pharmacological solutions.

Projecting the Rise of Healthcare Expenditures

A recent analysis from McKinsey found that national health expenditure in the US could grow at a rate of 7.1 percent over the next five years. This is well above the expected economic growth rate of 4.7 percent. These projections seem plausible given that healthcare spending accounted for over 18% of the US GDP in 2021 and that a continuation of our current trajectory would result in healthcare spending tripling to almost $12 trillion by 2040. That is 26% of the GDP.

Globally, the picture is similar to the US. From 2012 to 2020, all EU Member States except Greece saw healthcare expenditures rise. The total growth of healthcare spending in the EU for this period was 24%.

This trend is likely to drive revenue growth among healthcare companies not only because demand will rise but also because many areas of the healthcare industry already benefit from a level of profitability that exceeds most other industries. 
Consider research published in The Journal of the American Medical Association which concluded that, “the median net income (earnings) expressed as a fraction of revenue was significantly greater for pharmaceutical companies compared with nonpharmaceutical companies (13.8% vs. 7.7%).” This finding came after comparing the profits of 35 large pharmaceutical companies with those of 357 large, nonpharmaceutical companies over an 18-year period.

Isolating Key Areas of Growth

Healthcare IT

Healthcare IT involves the use of technology to improve healthcare delivery, including electronic health records, patient portals, and health information exchanges. As the healthcare industry becomes increasingly digitized, the demand for IT services is expected to continue to grow. Generally, this area consists of three parts, hardware, software, and services. 

Research forecasts an 18.5% compound annual growth rate (CAGR) for this segment of the industry through 2030. This growth will largely come from wider adoption of IT solutions that healthcare providers will use to bring increasingly personalized care to patients. As more healthcare providers adopt clinical decision support systems there is a greater need for IT solutions including more sophisticated electronic health records, cybersecurity, cloud backups, and telehealth.

Medical Devices

The medical device industry is rapidly growing as new technologies are developed and more patients seek non-invasive treatment options. Devices such as wearables, implantable devices, and minimally invasive surgical instruments are becoming more common.

Data from KPMG forecasts that the medical device industry will grow by 5% annually through 2030. This industry is segmented by end-user which consists of hospitals, home care, and diagnostic centers. Among these, the diagnostics centers segment is expected to experience the fastest growth with a CAGR of 9.2% through 2025. Additionally, as technological developments allow these devices to shrink, more people and healthcare professionals will adopt them into their everyday routines. 

Personalized Medicine

Personalized medicine involves tailoring medical treatment to an individual's unique genetic makeup, lifestyle, and health history. This approach is gaining popularity as advancements in genomic research and data analysis enable healthcare providers to provide more precise diagnoses and treatments.

This segment which consists of solutions designed to personalize diagnostics, therapeutics, medical care and wellness is poised to be the second fastest growing of the three with a CAGR of 11.6% through 2030. Innovations in healthcare are equipping professionals to deliver customized treatments that offer a more targeted approach to healthcare particularly in areas like oncology, immunology, and respiratory illnesses.  

Identifying Ways to Invest

It’s clear that the time to invest is now given that US national healthcare is estimated to reach $6.2 trillion by 2028, up from $4.3 trillion in 2021.

Here are a few ways to do it.

L&G Healthcare Breakthrough UCITS ETF (XMLH)

The fund is designed to track the ROBO Global Healthcare Technology and Innovation TR Index which is most heavily weighted to medical instruments, diagnostics, precision medicine, process automation, and genomics. About half of the holdings are large-cap companies and about one-quarter are mid-cap companies with over 80% located in the US.

Fidelity Digital Health UCITS ETF (FDHT)

Close to 80% of the fund is invested in healthcare companies focused on areas including surgical robotics, medical devices, glucose monitoring, hearing care, and cloud-based software solutions. About two-thirds of the holdings are in US companies with about 9% and 4% held in China and Switzerland respectively. 

Vanguard Health Care ETF (VHT)

This is a good choice for investors seeking a low-cost approach. The ETF holds 420 market-cap-weighted healthcare stocks. The holdings include companies offering healthcare products, services, technology, or equipment.

Please note this article is for information purposes only and does not in any way constitute investment advice. It is essential that you seek advice from a registered financial professional prior to making any investment decision.