In the midst of a bear market, smart investors are looking for a bright future for investments that have taken an uncharacteristic recent loss. You don't have to spend too much time researching to find many candidates. But finding investments that can withstand a prolonged challenging market can be more difficult.
iShares U.S. Medical Devices ETF (NYSEMKT:IHI) and Vanguard Healthcare Index Fund ETF (NYSEMKT:VHT) are two exchange-traded funds (ETFs) that provide a broad swath of portfolio coverage across medical devices and large-cap pharmaceutical companies. Both also suffer from an uncharacteristic negative year-to-date return, but history suggests a strong growth pattern. Owning these two ETFs can minimize an investor's risk while providing the potential for huge long-term gains.
1. iShares U.S. Medical Devices ETF
In 2022, Blackrock's medical device ETF is down nearly 22%. That's a huge difference from the 19% average annualized return it has produced over the past 10 years.
As medical device companies regain strength following setbacks caused by the pandemic, investors are seeing year-over-year revenue growth for major players in the sector. Thermo Fisher Scientific and Abbott Laboratories, both of which are top holdings in Blackrock's medical device ETF, produced double-digit sales growth in the most recent quarter, led by organic growth of more than 15% in the quarter on a year-over-year basis.
That's an example of what investors are looking for from this niche ETF. Unlike some ETFs that focus on hundreds of holdings, this one focuses on 67 domestic medical device companies. That's enough to provide a broad swath to minimize volatility but not so broad that it derails opportunity for strong growth from primary industry leaders. The ETF also comes in with a slightly lower-than-average 0.41% expense ratio compared to the 0.58% average for healthcare ETFs.
Medical devices is the largest segment of the growing medical technology market, which is projected to grow at a compound annual growth rate of 5.3% through 2026. The U.S. market, which this ETF focuses on, should be responsible for 34% of that growth, giving this ETF tremendous opportunity for investors. As part of the ETF's 10-year average annualized return of 19%, it has not seen a down year. You would need to go back to 2008 and 2011 for the last years that the ETF posted an annual per-share loss.
Hopeful investors might point toward a 38% and 16% gain, respectively, in the first year following the losses. With 2022 half over, signs of a recovery are starting to show up in many share prices. In fact, this ETF has sprung back by 10% over the past three weeks. Long-term investors looking for large gains are encouraged to check out this medical device ETF now.
2. Vanguard Healthcare Index Fund ETF
Similar to Blackrock, the Vanguard ETF has struggled in 2022. Down as much as 17% year to date as of June 16, it too is showing hints of recovery with a recent 10% climb over the past three weeks. The ETF's top holdings boast large-cap pharmaceutical companies like Johnson & Johnson and Pfizer, as well as healthcare insurance and provider giants like UnitedHealth Group. These "giants" are the kind of foundational companies suited to anchor a portfolio for years to come.
Since 2007, the ETF has produced double-digit returns in nine of the last 15 years, resulting in only two years with a negative return. Both losses were fully regained in the following two years. That equates to an average annualized return of 10% over the lifetime of the fund.
The need for healthcare services isn't going away. Diseases evolve, accidents happen, and an aging population calls for new healthcare requirements. An ETF like Vanguard that holds over 400 companies in its portfolio gives it access to an addressable market that includes a massive number of end users ranging from someone who needs a bandage to someone with a rare disease needing a pharmaceutical company to develop a game-changing treatment that could potentially generate billions of dollars in revenue.
Not every company in healthcare will succeed, but investors can benefit by holding shares of an ETF that has a strong position -- 41% of all holdings -- in the top companies in the industry while also having a position in the lesser-known names that may one day be at the top. As global healthcare requirements increase, the Vanguard ETF has treated investors extremely well since its inception -- enough to boost long-term investors' confidence going forward.
Simply put, an investment of $10,000 in this ETF just 10 years ago would be worth $25,000 today thanks to the compound gains achieved over that time. And it might be comforting to know that this fund has a track record, at least so far, of returning positive gains 87% of the time.