RYH: Equal Weight Healthcare ETF Generating Strong & Steady Growth

About RYH

Invesco S&P 500 Equal Weight Health Care ETF (NYSEARCA:RYH) is a healthcare exchange-traded fund (ETF) launched and managed by Invesco Capital Management LLC. The fund has assets under management (AUM) of approximately $1 billion which it has invested in public equity shares of companies primarily engaged in the business of Healthcare Equipment & Supplies, Healthcare Providers & Services, and Life Sciences Tools & Services. Together, these three segments account for around 71.5 percent of total investments spread over 47 stocks in almost all major companies in these sectors.

Another 18 Pharmaceutical and biotechnology stocks constitute another 26.7 percent of RYH’s total holdings. Through holdings of 65 stocks, RYH seeks to track the investment of the S&P 500 Equal Weight Health Care Index (SPXEWHC). The Index equally weighs all the healthcare stocks in its portfolio. As a result of which all these 65 stocks have more or less equal weightage (ranging between 1.4 percent to 1.7 percent) in RYH’s portfolio.

Dividend History

Both SPXEWHC and RYH are rebalanced quarterly. Invesco S&P 500 Equal Weight Health Care ETF has been paying quarterly dividends since 2007, almost from its inception. It has paid a steady dividend in the past 10 years, but the yield has been extremely low around 0.5 percent. Thus, this ETF is not for income seeking investors.

Historical Growth/Returns

RYH’s price returns have been steady and strong. Since its inception on November 1, 2006, RYH generated an annual average return of 13.74 percent, compared to 14.38 percent of its underlying Index. The difference in returns is primarily due to RYH’s expense ratio which is currently 0.4 percent. Over the past 10 years, RYH’s market return was very healthy at 17.8 percent. Over the past 3 years and 5 years, RYH has recorded an average market price growth of 22.5 percent and 17.7 percent respectively.

During the past 10 years, RYH has posted 19 percent plus net asset value (NAV) growth seven times, and recorded negative NAV growth only during 2016 (due to the negative impact of the Affordable Care Act) and in 2018.

It is to be noted that over the years, the NAV growth was almost the same as price growth for Invesco S&P 500 Equal Weight Health Care ETF. A 19 percent NAV growth during 2020 despite the Covid-19 pandemic related market crash is a confidence booster for investors. The entire healthcare sector witnessed a sharp downfall resulting in RYH reaching a five-year bottom price of $167.12 on 20th March, 2020. This equal weight healthcare ETF is currently trading around 85 percent higher than this.

Performance Within Overall Healthcare Sector

In fact, the healthcare sector has bounced back earlier than other sectors, and it again made significant losses in the past one year. However, unlike the recovery in 2020, the downward movement in 2021 was not spread across the length and breadth of the healthcare sector. More specifically, the large cap biotechnology, healthcare technology, and life sciences companies, had performed miserably, while pharmaceuticals and managed healthcare had a considerable flat growth.

On the other hand, healthcare equipment, medical devices, healthcare services, and healthcare supplies continued their growth momentum. On the basis of 53 percent investments in these sectors, Invesco S&P 500 Equal Weight Health Care ETF has been able to generate an impressive NAV growth of 23 percent during 2021.

Besides Invesco S&P 500 Equal Weight Health Care ETF, Invesco Capital Management LLC has another four ETFs in healthcare sector – Invesco DWA Healthcare Momentum ETF (PTH), Invesco Dynamic Biotechnology & Genome ETF (PBE), Invesco Nasdaq Biotechnology ETF (IBBQ), and Invesco S&P SmallCap Health Care ETF (PSCH).

Over the past one year, all these four ETFs have generated negative growth between 11 percent to 16.5 percent. Invesco S&P 500 Equal Weight Health Care ETF had a price growth of 13 percent during the same period. And during the last 15 years of RYH’s existence, its market price has grown (521 percent) much more than PTH (439 percent) and PBE (238.5 percent). PSCH and IBBQ had been launched much after RYH, so I am not considering them for this comparison.

Valuation

The stocks selected in Invesco S&P 500 Equal Weight Health Care ETF have an average P/E of 28.8 and a P/B ratio of 9.3. In comparison with the overall industry and index, these price multiples are a bit high. Although it can be concluded that the stock is overvalued, we cannot ignore the fact that there are enough reasons behind investors showing a high level of confidence in this healthcare ETF. However, the stock is trading at less than 5 percent discount to its 52-week high of $322.92 and there is scope for a downward rally of this fund.

This assumption of downward movement gets further validation as the long-term moving averages of this fund are above the short-term moving averages, as of 12th April, 2022. However, the gap between the 200-day SMA (304), 100-day SMA (302), and 50-day SMA (300) are so low, that even if there is a bearish rally for this ETF, that won’t last long. The price is already down by 2.5 percent from RYH’s last 3 months’ peak price of $315.41, and as the healthcare sector (except the biotechnology companies) keeps on recovering, it is expected that this ETF will start a bullish run quite soon.

Conclusion

This well diversified equal weightage healthcare ETF has generated strong and steady growth, much better than other Invesco healthcare ETFs. Historically it has generated an average return in the range of 13 percent to 23 percent. As an equal weight fund, RYH’s returns are less volatile, and less susceptible to be impacted by the performance of a few or even a significant percentage of stocks, say 20 stocks. We can see that those 18 large-cap biotechnology and pharmaceutical stocks did not significantly impact the performance of Invesco S&P 500 Equal Weight Health Care ETF.

Future growth prospects of this fund are dependent on the demand for healthcare products and services worldwide, which will anyway increase with time. It is expected that the ongoing pandemic/endemic, aging demographics and adoption of new medical products and services will surely generate long-term growth for healthcare companies in the medium and long run. Due to low volatility, there is not much risk involved in this ETF. Long term investors can easily bet on this portfolio to generate a strong and steady return. On top of that, an equal weight diversified healthcare portfolio makes Invesco S&P 500 Equal Weight Health Care ETF even more attractive.