In horse racing, to bet the field means to place a single bet on all of the entrants as one, not including the horse with the best odds to win. But in investing, if you're using odds in your analysis, then you might be breaking one of the primary ground rules: Do not confuse investing with gambling.
However, if you enjoy betting the field to minimize the risk of investing in the healthcare sector by predicting a single winner, then this exchange-traded fund (ETF) may be just what you're looking for. BlackRock's iShares U.S. Medical Devices ETF (IHI -0.46%) not only gives you access to the field, but you also get the so-called favorite, whichever that might be, in a massive healthcare market. For investors just testing the waters of healthcare, is this ETF the way to go?
Image source: Getty Images.
Core strength
The medical technology market is growing rapidly, with medical breakthroughs happening all the time. In order to keep up, companies are innovating and developing devices that monitor, analyze, solve problems, and provide robotic assistance in healthcare to help minimize injury risk, and to rebuild the body via procedures such as joint replacement. Many of the companies leading the way are top holdings in this iShares ETF.
Healthcare is a crowded and competitive field, but each company is aiming to be a leader and provide advancements in niche areas of medical technology, and to expand its reach to better improve healthcare overall. You have the likes of market-leading medical device companies such as Medtronic, Abbott Laboratories, and Stryker. It also includes companies that focus on life sciences, including Boston Scientific and Danaher.
All five of these individual companies are found in the top holdings of the iShares U.S. Medical Devices ETF, as well as in the top U.S.-based companies for estimated revenue market share in 2024, per Statista.
Not only does the ETF focus on medical technologies to improve human health, it also holds a decent 3% of total asset weight in IDEXX Laboratories (IDXX -0.09%), which interestingly, among other services, offers specialized equine testing and expertise in detecting serious diseases affecting horses and common pets. In fact, IDEXX has been an excellent performer for years, growing at a rapid pace with a stock price rocketing from $70 in 2016 to almost $500 in five short years.
History of performance
Despite the many challenges facing healthcare during 2020, the ETF continued on an upward trend in the first quarter of 2021, coming in with a 47% one-year return, and beating the S&P Composite 1500 Health Care index by about 11%. It has also paid out a cash dividend in 18 of the past 20 quarters, including all of 2020 and the first quarter of 2021.
One downside of the ETF investment is that you take a hit on potential maximum dividends due to a low current dividend yield of 0.24%. By contrast, the average dividend yield of Abbott Labs, Medtronic, and Stryker comes in at 1.37%, with all three coming in higher than the iShares ETF on an individual basis.
| Time Period | iShares U.S. Medical Devices ETF Return as of March 31 | Benchmark Index (SPDR 1500 Healthcare) as of March 31 |
|---|---|---|
| 1 Year | 47.01% | 35.94% |
| 3 Years | 21.68% | 15.35% |
| 5 Years | 22.39% | 14.12% |
| 10 Years | 18.39% | 15.82% |
| Life | 13.99% | 12.46% |
Data source: Fidelity.com.
Hidden strength
There are tons of new companies attempting to enter the medical device market. In 2020 alone, there were 45 start-ups in the medical devices space that received over $100 million in funding. Most of us don't have the time to research every start-up to find the next Medtronic or Intuitive Surgical. One benefit of investing in the iShares ETF is that you've got an ETF manager keeping an eye on that for you, and actively taking actions to adjust holdings for optimized returns.
If just one or a handful of new companies finally hit their payday with the next big breakthrough device and an ensuing IPO, rejoice. The ETF manager is likely to add those assets to its holdings, which means your investment in the field just gained new contenders.
On the flip side, investing in an ETF can also provide some risk of its own in the way of uncontrolled investments you may not agree with. The ETF manager may decide that an upcoming IPO is worth a large spot in the portfolio holdings. Suddenly, you're indirectly investing in a stock that your personal research has led you to avoid.
The problem is, the purchase is usually already made before you see it in an updated holdings list. For example, the next time you see the list you notice that a brand new ticker from a recent IPO is now 4% of holdings, and that one of your previous favorites from the list has suddenly been trimmed by 4%. You may not be thrilled at the sight of this change.
The future is now
In this age of artificial intelligence, autonomous vehicles, and general automation replacing manual operation, medical technology will undoubtedly continue to expand and grow. With natural human physical and social evolution, there is an ongoing need for innovation and development in the healthcare industry, specifically for MedTech.
An investment in a single company can provide you with a level of risk and reward that you might be okay with, but depending on your investor profile, an investment in the iShares Medical Devices ETF may provide you with that same level of reward or greater, with minimized risk.
