Investing in the healthcare sector

The healthcare sector is dynamic and constantly innovating, creating new investment opportunities. Have you thought about investing in healthcare? Then, keep reading to find out more about this sector and ways to invest in it.

Industries within the healthcare sector

The healthcare sector is broad and spreads across several industries. In fact, it’s the third-largest sector within the S&P 500, as of January 2024. There are two main industries within the healthcare sector, which both have three sub-industries:

• Healthcare Equipment & Services
  • Healthcare equipment & supplies—companies that manufacture medical equipment and supplies, including everything from bandages to stethoscopes to MRI machines (e.g., Envista Holdings, Nipro, Sonova)
  • Healthcare providers & services—companies that provide healthcare services, owners and operators of healthcare facilities, insurers and distributors and wholesalers of healthcare products (e.g., Walgreens Boots Alliance, McKesson Corporation, Cardinal Health)
  • Healthcare technology—companies that provide information technology tools and services to healthcare providers (e.g., Allscripts, Cerner Corporation, Computer Programs and Systems, Inc.)
• Pharmaceuticals, Biotechnology & Life Sciences
  • Biotechnology—companies that research, develop and produce products derived from living organisms (e.g., Novo Nordisk, Galapagos, Regeneron Pharmaceuticals)
  • Pharmaceuticals—companies that research, develop and produce products made primarily from artificial sources (e.g., Johnson & Johnson, Pfizer, Roche)
  • Life sciences tools & services—companies that provide analytical tools, clinical testing services and contract research services to enable drug discovery and development (e.g., Bionano Genomics, Charles River Laboratories, Illumina)

Most traded healthcare stocks

The most-traded healthcare stocks through our platform during the period 01.01.24-20.09.24 were:

How to choose the right healthcare stock

When selecting a healthcare stock for your investment portfolio, you can consider the following factors:

• Evaluate the company's financial health and stability.
• Analyze its product pipeline or services portfolio for potential growth opportunities.
• Assess the competitive landscape and market demand for its offerings.
• Stay updated on regulatory changes that may impact the industry.
• Diversify your holdings across different types of healthcare stocks to manage risk.

How to invest in healthcare

Healthcare offers many investment opportunities being so broad. Some of the more common ways to invest healthcare include:

• Stocks — One way to invest in healthcare is through stocks within the sector. Since there are many sub-industries, there are plenty of options.
• ETFs — Healthcare ETFs make it easy to gain exposure to multiple companies within the sector in a single product. For example, the SPDR MSCI World Healthcare UCITS ETF tracks the performance of stocks within the healthcare sector, including companies such as Johnson & Johnson, Roche and Thermo Fisher Scientific.
• REITs — You can also invest in healthcare real estate investment trusts (REITs), for example, Welltower and Omega Healthcare Investors. REITs in this field typically invest in property types such as hospitals, senior living complexes and medical offices.

Advantages of investing in healthcare stocks

Investing in the healthcare sector can offer several opportunities for you as an investor.

• Steady growth: Regardless of economic conditions or market fluctuations, the need for quality healthcare remains constant. People need medical care regardless of recessions or political uncertainties, making healthcare stocks relatively immune to external shocks. This stability provides investors with a sense of security, especially in turbulent times when other sectors may experience significant volatility.
• Demographic tailwinds: As populations in developed countries age, the demand for medical services and pharmaceutical products increases. In addition, emerging markets are witnessing a rise in middle-class populations with greater access to healthcare services than ever before. These trends are creating opportunities for companies in the sector to expand their reach and generate significant revenues.
• Technological innovation: Healthcare is at the forefront of technological advances that have revolutionised patient care and treatment methods. From cutting-edge therapies to telemedicine solutions, technology plays a critical role in improving efficiency and outcomes within the industry.
• Regulatory barriers to entry: Obtaining regulatory approvals and meeting stringent quality standards requires significant investments of time, money and expertise. This creates a high barrier to entry, reducing competition and increasing the market share of existing players. Investors in healthcare stocks can use these barriers to their advantage by investing in companies that have already overcome them.
• Diversification benefits: Healthcare stocks can offer an excellent opportunity for diversification due to their low correlation with other sectors such as technology or energy. By including healthcare stocks in your investment mix, you can reduce the overall risk of your portfolio through exposure to an industry that behaves differently from others.

Risks of investing in healthcare stocks

With their potential for growth and innovation, healthcare stocks can be attractive to investors. However, as with any investment opportunity, there are risks that investors need to be aware of.

• Regulatory challenges: The healthcare industry is highly regulated due to its critical nature and impact on public health. Changes in regulation can significantly affect healthcare companies' operations and profitability. For instance, new regulations or changes in reimbursement policies can lead to increased costs or reduced revenue for pharmaceutical companies or hospital operators.
• Clinical trial failures: Pharmaceutical and biotech companies invest substantial amounts of money and time into developing new drugs and therapies. However, not all clinical trials are successful. Failed trials can have a severe impact on stock prices as it not only affects future revenue streams but also damages investor confidence.
• Patent expirations: When patents protecting blockbuster drugs expire, generic competitors can enter the market, leading to a significant loss of market share and revenue for the original drug manufacturer. Investors need to closely monitor patent expiration dates when considering investments in pharmaceutical companies.
• Competitive landscape: New entrants with innovative solutions can disrupt established players' market share and profitability overnight. Companies must constantly adapt to stay ahead of their competition through research and development efforts or strategic acquisitions.