COLUMN-Healthcare: A remedy for long-term investors

Mon Aug 4, 2014 3:03pm EDT

(The opinions expressed here are those of the author, a columnist for Reuters.)

By John Wasik

CHICAGO Aug 4 (Reuters) - For healthcare, gray is the new black.

The fastest-growing segment of the global population is aged 60 and over, according to the United Nations Department of Economic and Social Affairs. That slice of humanity is expected to increase by 45 percent by 2050.

The surge in the older population has contributed to a wave of new product introductions in biotechnology, medical devices and pharmaceuticals, and expansion of healthcare services.

In addition, healthcare is a remarkably durable sector for investors, soldiering on despite periodic market downturns, like the one seen last week when the S&P 500 index had its worst week since 2012.

Overall, there's a bounty of money being spent on healthcare that's unlikely to be impacted by other economic trends.

One of the best ways to own the biggest players in the healthcare industry is through the Vanguard Health Care ETF , which holds global giants like Johnson & Johnson , Pfizer Inc. and Merck and Co..

Charging 0.14 percent in annual management expenses, the Vanguard fund, which is almost entirely invested in U.S.-based stocks, gained 20 percent for the 12 months through Aug. 1, compared with 15 percent for the S&P 500 Total Return Index. Long-term, the Vanguard fund has been a solid performer, averaging 10.5 percent annually for the decade through Aug. 1. That compares with an average 7 percent return for the MSCI World NR stock index.

For more non-U.S. exposure, consider the iShares Global Healthcare ETF, which charges 0.48 percent for annual expenses.

The iShares fund has about 60 percent of its portfolio in North American stocks, with the remainder in European and Asian-based companies such as Novartis AG, Roche Holding AG and GlaxoSmithKline PLC. The fund gained 19 percent over the 12 months through Aug. 1.

For a more focused play on leading-edge biotech and genomic companies, the First Trust NYSE Arca Biotech Index ETF samples some of the hottest companies in that sub-sector. Holdings include industry leaders Gilead Sciences Inc., Biogen Idec Inc. and InterMune Inc..

The First Trust fund was up nearly 25 percent for the 12 months through Aug. 1; it charges 0.60 percent in annual expenses.

GOOD VALUATIONS AVAILABLE

Since most institutional portfolio managers have seen the merits of healthcare stocks for years, there are probably few bargains available, although some sectors are pricier than others. Biotech stocks, in particular, are in high demand, although they experienced a sell-off earlier this year.

"On the other hand," Fidelity Investments analyst Eddie Yoon said in a recent report, "some large-cap, stable growth companies across the (healthcare) sector continue to appear attractive, based on their stable underlying business fundamentals."

Unlike other sectors such as consumer discretionary that are directly tied to overall economic conditions, healthcare is often insulated from broader economic trends. When the S&P 500 index dropped 37 percent in 2008, the Vanguard fund only lost 23 percent; the First Trust fund was off 18 percent. While biotech stocks tend to be volatile, the mainstream healthcare companies are seen as defensive holdings and more immune to broader market pressures and poised for bankable growth.

Long term, the more volatile biotech stocks of today may be tomorrow's winners. The growing science of genomics will allow biotech companies to customize drugs to a patient's genetic make-up. Just three years ago it cost $95 million to sequence a human genetic code. Now it costs about $4,000, with the price dropping every year. That will translate into more precise treatments with fewer side effects.

There are several concurrent waves of innovation in health information technology, diagnostics and delivery of services. More patients can be monitored and treated at home with the improvement in information technology. Diseases are being discovered and treated earlier, which means fewer hospitalizations.

In the United States alone, healthcare spending is buoyed by the $3 trillion spent annually on Medicare patients. While policymakers say this number is unsustainable and must be reined in, that does not change a key fact: Some 10,000 Baby Boomers are turning 65 every day. They will continue to demand the best drugs and treatments. (Follow us @ReutersMoney or here Editing by Lauren Young and Leslie Adler)