Large-cap American companies, such as Pfizer and J & J, could be your solution
This article was produced in partnership with Harvest ETFs.
Market volatility, low yields from fixed income, and inflation are testing advisors, but one portfolio manager said US health care stocks, especially for large-cap companies, offer a unique set of traits ideally suited for these testing times.
“This is an uncertain time for investors,” Paul MacDonald, Chief Investment Officer for Harvest ETFs told Wealth Professional. “When we look at the macro backdrop that we have, we have three elephants in the room: interest rates, driven by inflation and also tied to the war in Ukraine and implications of that. So, when you think of places that Canadians should have exposure, I think health care fits.”
The Harvest Healthcare Leaders Income ETF (HHL: TSX) is an equally weighted portfolio of 20 large-cap American health care companies, which have been selected for their potential to provide attractive monthly income and long-term growth. Launched as a closed-end fund in 2014, it was converted to an ETF in 2016. A U class was added in 2017, and the ETF just crossed $1 billion in AUM recently.
MacDonald said the ETF, the largest health care ETF in Canada, has a covered call strategy, so generates monthly income. That aids those whose fixed income portfolios are being impacted by rising rates and high inflation.
“Where do you go to keep your purchasing power for the income that you generate from your investments?” he asked. “Because the yield people are getting is less than inflation, so it is negative in a lot of fixed income products.”
Health care is one of the market areas with really good exposure to non-cyclical permanent dynamics and long-term secular growth. It’s also driven by an aging population spending more on health care and technological innovation, including drugs, equipment, and spending in developing markets.
There is also little opportunity in Canada to participate in those longer-term themes, so Harvest has turned to the American market.
“We want to deal with U.S.-listed large caps because we also have an option strategy and want to be generating cash flow,” said MacDonald. “We’re not looking to try to find the next single asset company or novel drug. We want the companies that have proven abilities to execute.”
The 20 companies in the ETF were culled from a field of about 85 of the 3,000 health care companies in this universe. The fund is actively managed with a quarterly portfolio re-constitution and rebalance, but Harvest generally only has to change one or two companies a year. As of April 8, its NAV was $9.06, and its current yield was 7.73%.
Some of the companies, such as Pfizer, have also benefitted from the pandemic. MacDonald noted that is because Pfizer is expected to be the dominant vaccine maker by 2024, especially as it’s developed an oral antiviral that has 90% efficacy that has it pulling ahead of its competitors.
“Our performance has actually been very strong,” said MacDonald, encouraging advisors to look at this as a short, medium, and long-term growth solution.
“We’ve got an uncertain macro environment, so I would argue that diversifying across sub-sectors is very key. I want advisors to take a look at health care as a core sector, and it’s something that we can’t get in Canada,” he said.
“So, advisors would be well served to have a solid position in health care, but make sure it’s the right type of health care for their needs. There are alternatives with higher risk data that people are looking to get, but we tend to be more focused on the dominant large-cap companies to offer the best solution for Canadians.”