The iShares Global Healthcare ETF (NYSEARCA: IXJ) is part of BlackRock's wildly successful iShares fund series. It was released in November 2001 and is designed to track the performance of the S&P Global 1200 Healthcare Sector Index. This benchmark is highly weighted, almost 99%, toward the health care sector, with the remaining fragments in technology stocks.
Health care companies come in many different forms, but their performances are all tied to the rising profitability of providing health-care services. This includes medical equipment, pharmaceuticals, health care providers and biotechnology.
The underlying index is set and adjusted by the S&P Dow Jones Indices LLC, a subsidiary of McGraw Hill Financial, Inc. Companies are selected based on their prevalence to the domestic and global health care sector; nearly all of IXJ's holdings are considered large- or giant-cap. The fund reserves the right to invest in mid- and small-cap companies.
Notable holdings include Novartis AG, Johnson & Johnson, Pfizer Inc. and Roche Holding AG. No single stock comprises more than 6.29% of the underlying portfolio. Roughly two-thirds of IXJ stocks are from U.S. companies, with the rest mostly from the European Union. There are normally 85-95 holdings in total. BlackRock designed IXJ to promote exposure to huge medical companies that have been specifically targeted around the world, paying attention to global outreach and regulatory pressures.
As of mid-2015, IXJ managed more than $1.70 billion in total assets. The fund's management team, BlackRock Investments, averaged 3% in annual holdings turnover and reported an annual expense ratio of 47 basis points, or 0.47%. A management fee of 47 basis points is a little high for the fund category, though it is below average for exchange-traded products in general.
Suitability and Recommendations
Health care stocks gained extra attention after the Affordable Care Act, or "Obamacare," was passed in 2010. Nobody in the investment industry knew exactly how the landmark legislation would impact health care stocks, though most believed stock prices would rise because the Act made it more difficult for providers to compete over services, thus locking in profits for existing entities.
Increased interest in the industry can be seen in growth in the health care fund category; there were only seven such funds in 2005, but that number reached nearly 20 in the months after the passing of health care reform.
Shareholders of IXJ should keep close eye on the developments of the American regulatory environment regarding health care. As a general rule, new regulations make it harder for new firms to compete and help established players. This rigid form of competition makes IXJ noncyclical; this is evidenced by a beta of 0.52.
In fact, IXJ only has a standard deviation of 8.86%. The underlying portfolio's average price-to-earnings (P/E) has risen since the passing of Obamacare, and it reached 26.25 by mid-2015. The fund's alpha rating was a solid 5.33 in 2005, but that number surged to 12.44 by 2015. Modern portfolio theory (MPT) suggests that, in a vacuum, management must have went from very good to incredible over that time period. The more likely answer is the firms were able to use regulatory change to lock in higher earnings.
This ETF does not offer any currency hedging. Because a little more than one-third of the portfolio is in non-U.S. equities, shareholders are exposed to a modicum of currency risk. And, while the fund is noncyclical, it does concentrate almost entirely in one sector. This lack of diversity should be concerning and makes IXJ ill-suited to form a core holding for buy-and-hold investors.
All told, IXJ is a relatively low-risk, low-return ETF highly influenced by regulations on the health care industry. It can play as a defensive holding for investors whose primary portfolio is highly correlated with the U.S. equities market.