Canadian Pharmaceuticals: Invest in the Future of Healthcare

These two ETFs can provide Canadian investors with exposure to global healthcare equities.

Tony Dong, MSc, CETF®

Author Bio Tony turned a series of marijuana stock losses in 2017 into a self-employment venture, focused on helping retail investors build better portfolios with exchange-traded funds (ETFs). He is the founder of ETF Portfolio Blueprint and the Lead ETF Analyst for ETF Central, a partnership between Trackinsight and the New York Stock Exchange. He also currently writes freelance for MoneySense, U.S. News & World Report, Kiplinger, and 24/7 Wall St., and runs an investing-focused newsletter called The Dumb Money Dispatch with 3,300+ subscribers. Outside of finance, Tony owns a small ranch in rural British Columbia, raising goats and chickens, and also volunteers as a wildland firefighter in his local community. His background includes service in the Canadian Armed Forces as a reservist and stints in corporate security. Education Master of Science (MSc) in Enterprise Risk Management, Columbia University Bachelor of Arts (BA) in Criminology, Simon Fraser University Certified ETF Advisor (CETF®), The ETF Institute Securities Industry Essentials (SIE), FINRA Canadian Securities Course (CSC), Canadian Securities Institute Areas of Expertise ETFs, mutual funds, Berkshire Hathaway, indexing, dividend stocks, royalty trusts, REITs, infrastructure, aerospace & defence, passive income investing, portfolio construction, risk management, RRSPs & TFSAs. Social Media Profiles https://www.linkedin.com/in/tzld96/ https://www.youtube.com/@okanaganhomesteader Favorite Investment Quote "Rule No. 1: Never lose money. Rule No. 2: Never forget Rule No. 1." - Warren Buffett

Published May 18, 2023 10:30 am EDT

The healthcare sector is unique. It encompasses a wide array of industries, from pharmaceuticals and biotechnology to health services and medical equipment. Its resilience combined with the potential for high growth due to technological advancements and an aging global population make it an attractive proposition for investors seeking both stability and growth.

For Canadian investors, however, there’s a catch. The Toronto Stock Exchange (TSX), Canada’s dominant stock exchange, has a very underwhelming representation of healthcare stocks. This lack of exposure can lead to missed opportunities in a sector that continues to show promising growth and resilience, especially in times of broader market volatility.

Fear not, though — for aspiring Canadian healthcare sector investors, there are numerous exchange-traded funds, or ETFs out there that provide affordable, transparent exposure to defensive U.S. and international healthcare sector stocks. Let’s take a look at my two favourite picks today!

Biotech stocks — Image source: Getty Images

The U.S. option

A great pick for indexing a diversified portfolio of 69 top U.S. healthcare sector firms is BMO Equal Weight US Health Care Hedged to CAD Index ETF (TSX: ZUH). As its name suggests, this ETF is equal weighted. This means that each company in its portfolio is given the same emphasis, which boosts diversification.

You’re also getting some great industry representation with ZUH. Currently, around 25% of the ETF is held in healthcare equipment stocks, 24% in biotechnology, 19% in life science tools, 13% in pharmaceuticals, and 7% in healthcare services. In short, ZUH provides broad exposure to the entire U.S. healthcare sector.

It’s also very tax efficient, with a low annualized distribution yield of 0.42%, making it a good holding outside of a Tax-Free Savings Account or Registered Retirement Savings Plan. The ETF charges a reasonable management expense ratio (MER) of 0.40%, which works out to around $40 in annual costs for a $10,000 investment.

The global option

Investing in healthcare doesn’t mean just sticking to U.S.-based companies. International companies also produce some of the leading pharmaceuticals, medical equipment, and services we rely on. To track them, consider iShares Global Healthcare Index ETF (CAD-Hedged) (TSX: XHC).

This passively managed index ETF tracks S&P Global 1200 Health Care Canadian Dollar Hedged Index, which holds 114 market-cap weighted healthcare companies from around the world. Unlike ZUH, XHC is not equally weighted. Rather, larger companies are held in higher proportions.

The market-cap weighted nature of XHC also results in a U.S. bias, with 69% of the ETF held in American healthcare companies. Next highest are Switzerland, Japan, and the U.K. at around 8%, 5%, and 5%, respectively. In terms of fees, XHC costs the same MER as ZUH at 0.40%.