Equity: U.S. Health Care Equipment & Supplies
The US Health Care Equipment & Supplies segment offers investors exposure to a narrow subsector within the larger US health care space, focused specifically on companies engaged in the
“2/3 of XHE is weighted in small- or micro-cap companies.” manufacturing and distribution of medical equipment and supplies. While there may be significant overlap in holdings between the two existing funds in the segment—the SPDR S&P Health Care Equipment ETF (XHE) and the iShares Dow Jones U.S. Medical Devices ETF (IHI)—the two portfolios are markedly different in exposure.
IHI is a cap-weighted fund holding 50 stocks and its top holdings are jam-packed with large-cap names like Medtronic, Covidien, Intuitive Surgical and Stryker. In fact, it's highly concentrated, with the top 10 holdings accounting for almost 2/3 of the fund's total weighting. XHE, in contrast, holds more names in equal weights. This tilts the fund smaller in cap; 2/3 of XHE is weighted in small- or micro-cap companies.
IHI, launched in 2006, is clearly the more established of the two funds, and is our analyst pick for the segment. IHI has a large, stable AUM, while XHE, which launched in January 2011, has been slow to gather steam. While XHE charges less than IHI, its trading costs may be higher due to poor liquidity. (Insight updated 02/27/17)
ETF.com Efficiency Insight
Both IHI and XHE are very efficient funds. XHE is the cheaper of the two. Still, IHI keeps up with XHE's Efficiency score due to its tight tracking, tax efficiency and size.
“XHE is the cheaper of the two” tax-efficiency front, IHI is the standout—it has never paid out capital gains distributions since its inception in June 2006. XHE has already paid out capital gains three times in its comparatively short trading history—likely due to its equal-weighing scheme and frequent rebalancing. Investors should also be cognizant of XHE’s low assets under management, though we don't currently see elevated closure risk. IHI is the more established fund, with plenty of assets and little or no risk of closure. (Insight updated 02/27/17)
ETF.com Tradability Insight
For investors concerned about liquidity, IHI is clearly the better choice here. XHE is somewhat illiquid, with lackluster volume and wide spreads, making limit orders necessary to control
“For investors concerned about liquidity, IHI is clearly the better choice.” trading costs. IHI's liquidity looks nearly perfect by comparison. For institutional traders, IHI also has the best block liquidity, meaning larger blocks can be traded with minimal cost and relative ease if done through a liquidity provider. (Insight updated 02/27/17)
ETF.com Fit Insight
While the two funds target a similar sector within the US health care space and carry significant holdings overlap, their portfolios are markedly different. XHE’s equal-weighting
“IHI is cap weighted, helping it score relatively well in Fit.” scheme tilts the fund extremely small, although the fund doesn't take on much additional market risk. In fact, over 2/3 of XHE is weighted in small- and micro-caps.
Like our Thomson Reuters benchmark, IHI is cap weighted, helping it score relatively well in Fit. IHI tilts larger, with over 60% of the fund’s total weighting coming from its top 10 holdings, which consists of established large-cap names in the sector, including Medtronic, Covidien, Thermo Fisher and Stryker—it even carries a growth component, heavily weighting companies like Intuitive Surgical.
While the volatility associated with this narrow sector may be hard to stomach for some investors, both IHI and XHE provide great alternative plays for those health care investors looking to shy away from the heavy hand of big pharma and health care providers, both of which dominate the broader health care segment. (Insight updated 02/27/17)