Exchange-traded funds offer a convenient way to invest in sectors or niches that interest you. If you'd like to add some medical-device companies to your portfolio, the iShares Dow Jones US Medical Devices ETF (IHI 0.23%) could save you a lot of trouble. Instead of trying to figure out which companies will perform best, you can use this ETF to invest in lots of them simultaneously.
The basics
ETFs often sport lower expense ratios than their mutual fund cousins. The iShares ETF's expense ratio -- its annual fee -- is a relatively low 0.47%. The fund is fairly small, too, so if you're thinking of buying, beware of possibly large spreads between its bid and ask prices. Consider using a limit order if you want to buy in.
This ETF has performed well, beating the world market over the past three and five years. As with most investments, of course, we can't expect outstanding performances in every quarter or year. Investors with conviction need to wait for their holdings to deliver.
With a low turnover rate of 20%, this fund isn't frantically and frequently rejiggering its holdings, as many funds do.
Why medical devices?
With our planet's population growing and aging and living longer, and many economies developing, it's safe to say that there's likely to be plenty of demand for medical devices over the years ahead.
More than a handful of medical-device companies had strong performances over the past year. Intuitive Surgical (ISRG -0.55%), a dominant force in robotic surgical machines, jumped 26%, as more hospitals bought its equipment and then proceeded to generate recurring revenue for the company by buying service contracts and consumable accessories and supplies for the machines. The company is not alone in its field, but it is the leader. MAKO Surgical (MAKO.DL), which focuses on orthopedic procedures, is a far smaller company. Intuitive recently got clearance to offer surgical stapling products, which is a lucrative new arena for it.
Varian Medical Systems (VAR) gained 17%, much of it on a single day after it posted strong quarterly earnings, particularly because of strength in its oncology and X-ray divisions. Management offered bullish projections as well. The company ended its fiscal year with revenue up 8% and its backlog up 12%, to $2.8 billion.
Other companies didn't do as well last year but could see their fortunes change in the coming years. Boston Scientific (BSX 5.68%), meanwhile, shrank by 5%. Its fans like its new CEO, insider buying, declining debt, a promising pipeline, and a low valuation. They also like its recent purchase that puts it in a solid position in hypertension devices. While some are pleased to see an increase in free cash flow that's being used to fuel share buybacks and acquisitions, my colleague Dan Carroll would like to see improvements in the company's interventional cardiology and cardiac rhythm management divisions.
St. Jude Medical (STJ) shed 2%. Like many of its peers, it's being pressured by weakness in Europe. Still, the company reinstated its dividend in 2011 and has already increased it, by 10%. (It recently yielded 2.6%.) The company is investing in new growth markets such as hot transcatheter valves, and it's spending heavily on research and development. These bode well for the company, though there are always risks, such as a tougher regulatory environment, a new medical-device tax, and the quality issues it has had.
The big picture
Demand for medical devices isn't going away anytime soon. A well-chosen ETF can grant you instant diversification across any industry or group of companies -- and make investing in and profiting from it that much easier.
