US Medical Devices (IHI) : Back in trend

The ETF IHI (Ishares), created in 05/2006, replicates an index based on a selection of 51 stocks specialized in the manufacture and distribution of medical equipment. The index tracked is the Dow Jones U.S. Select Medical Equipment Index. It is a geographically highly specialized index, composed mainly of US stocks and quoted in USD.

The cost of this ETF is 0.44% in the high average of our selection and the AUM is approximately $ 2989m. The replication method is straightforward and there is a dividend distribution policy on a quarterly basis.

Alternative ETF: XHE (SPDR in USD)

 

Index & components

IHI replicates an index composed of growth companies, most often with high technological content.

These companies, which may be competitors, have developed special technologies (cardiology, Urology, neurology, etc.) that make it possible to improve the situation of patients, such as Medtronics (9.7% of the index) or Boston Scientific (5% of the index) while other companies provide equipment for hospital management or surgery (eg Baxter).

These companies are not peers to companies in the pharmaceutical or biotechnology sector, in the sense that they do not sell drugs and do not develop molecules but devices that will use a given technology (electrical, electronic, ultrasound ...) to improve the situation of patients, such as pacemakers, which are usually accompanied by specific treatments marketed by the laboratories.

This index is quite deep, but the top ten companies account for more than 62% of the index, as it is a fairly capital-intensive sector, a research and development consumer and requires industrial and marketing capabilities.

The performance of the index (in USD, its currency of quotation) is outstanding with 335% cumulative gain since its introduction on the US market (Nyse) in May 2006, a decade ago while the remaining huge potential makes it a "Buy & Hold" investment. The key elements for the industry are technological innovation, driven by computational power and software development, regulation (health policy / reimbursement), and demographic impacts such as the aging of the population that ensure a natural growth to this market.

The long-term potential seems very high because technological innovation, and in particular the development of nano-technologies, is expected to shake the market over the coming years, the sector appears at the beginning of an innovation cycle.

In the short term, uncertainties in US health policy will prevail, while valuation multiples are relatively high (28x PERs), but justified by strong and steady growth.

 

Latest developments

IHI's performance has been more than 23% since the beginning of the year, well above the S & P500 (+ 2.6%), after a 30% increase in 2017.

The sector benefits from its lower exposure to the economic cycle and to the trade war that China and the US are engaged in, compared to other highly exposed growth sectors such as technology or consumer goods.

The US medical equipment sector is showing tremendous momentum as it addresses a global market where technological innovations are spreading faster and faster. In fact, the market is essentially valuing the product cycle in a market that is growing twice as fast as the US economy, as well as consolidating the sector, which continues notably via major companies such as Medtronics or Boston Scientific, while companies are posting operating margins in the order of 15 to 20% - in steady growth and whose medium-term potential is huge.