Home Beginner Market Structure Fundamentals Of Healthcare Sector – Pros & Cons Of Investing In It

Fundamentals Of Healthcare Sector – Pros & Cons Of Investing In It

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Introduction

The healthcare sector is one of the most widespread sectors in the stock market. Also, it is considered to be the most complex industry to comprehend, compared to other industries such as the financials, consumer discretionary, consumer staples, utilities, energy, real estate, industrials, materials, and telecom. The healthcare sector has quite an impact on the economy of a country. In the upcoming topics, we’ll be discussing the healthcare sector you must know.

What is the HealthCare Sector?

The healthcare sector consists of those companies which manufacture medical products (drugs), provide medical services to the patients, and also provide health insurance to the people.

This is that sector in the market, which always has an inelastic demand. That is, whatever is the price of the product, the people’s demand to buy the product is absolutely unaffected. Therefore, these companies’ profit margin is significantly high.

What is the Healthcare industry made up of?

The makeup of the Healthcare sector – Detailed description

There are four major subsectors that come under the Healthcare sector:

Healthcare service and facilities

Hospitals are considered as primary healthcare service providers. Hospitals provide medical treatment services to patients. The different types of hospitals include General medication hospitals, surgical hospitals, Psychiatric hospitals, Family Planning & Abortion Clinics, Sleep Disorder Clinics, Emergency care centres, Hospices & Palliative Care Centers, Blood & Organ Banks., and Dental Clinics.

Healthcare services and facilities other than Hospitals include Nursing and residential care facilities, Medical Practitioners & Healthcare Professionals, and Ambulatory health care services.

Medical equipment, devices, and hospital provisions Manufacturers

There are a gigantic number of healthcare equipment and devices that are manufactured by healthcare manufacturers. We can classify these devices by their use. Imaging diagnostics such as Digital X-Ray and Mammography machines, Multi-slice TC, Magnetic Resonance, Ultrasound Imaging devices Angiographic and Hemodynamic systems, mainly used in X-ray and interventional cardiac departments. Operating theatre machines: operating tables and lamps, electronic scalpels, anaesthesia machines, operating-theatre-specific X-Ray machines and so on. The list of devices/machines and equipment is as wide: electrotherapeutic and Electro-medical, Irradiation apparatuses, In-vitro diagnostic substances, Surgical appliances and supplies, Vital Signs Monitors,  Hot & Cold Topical Therapy, Medical Laser machined, Optical Coherence Tomography Machine, Endoscope, Robotic Surgery Equipment, Venous Access Device, Wound Care Products,  Glucose Meter,  Instrument Sterilization Product, Ultrasonic Cleaning Equipment, etc.

To this list, we can include dedicated software and hospital networks: PACS, Patient Information Systems, IA-driven 3D imaging workstations, 3D software and robotics for the operating theatre, Hospital management systems and so on…

Medical Insurance and Managed Healthcare

As the name suggests, these are the companies that provide health and life insurance policies to the patients. The managed health care is used to describe a variety of methods used to reduce the cost of health care service and benefits and improvise the quality of care. This subsector also consists of services such as Health maintenance organizations (HMOs), Exclusive provider organizations, Healthcare Consultants, Medicare, Medicaid, Medical Waste Disposal Services, Dental Insurance, Corporate Wellness Services, Pharmacy Benefit Management, etc.

The Pharmaceutical Segment

This industry develops, produces, and supplies drugs to the people. The various kinds of drugs available at the drug stores are Over-the-counter (OTC) drugs, Prescription drugs, Generic drugs, and Biopharmaceutical drugs. Other services in this segment include Pharmaceuticals Packing & Labeling Services, Cough & Cold Medicine Manufacturing, Vitamin & Supplement Manufacturing, Dietary Fiber Supplement Manufacturing, etc.

Investing in the Healthcare sector

Investing in any sector of the stock market is quite a tedious task. There are several factors that must be considered before putting your money into it. Having said that, understanding the advantages and disadvantages of investing in a particular sector can be considered as one of the most critical factors of an investment process. Every sector has its own benefits and drawbacks of investing, so does the healthcare sector.

Advantages of investing in the Healthcare sector

This sector is a consistent performer:
This sector is seen to perform consistently compared to other sectors in the market. Therefore, one can consider having a healthcare sector stock in their portfolio.

Unvarying demand for the Healthcare sector:
This can be considered as one of the reasons for the healthcare sector’s consistent performance. There is always a need for medical products and healthcare services, no matter the economic status of the country. In other words, the stock prices are typically immune to any economic growth or decline. This in-turn reduces extreme downfall in the stocks during recreation.

Improved Research and Development:
Investing and raising funds in the healthcare sector helps the Research and Development firms to develop better. It can aid them to come up with new cures for diseases such as cancer and heart diseases. Therefore, investing and having a long term sight in this sector can bring fruitful results in the future.

Drawbacks of investing in the Healthcare sector

Requires immense amount of scientific knowledge
Investing in the healthcare sector is unlike investing in other sectors. Apart from fundamental and technical analysis, investing in healthcare stocks requires a good knowledge of medical factors as well.

Investors must carefully look at the stock prices during events such as FDA approval because a decision against the company can lead to the stock prices fall significantly.

Healthcare Mutual Funds and ETFs

Healthcare Mutual Funds

Investing in the healthcare sector can be complicated at times. Investors looking forward to investing in this sector but are not equipped with sufficient amount of knowledge can consider flowing their capital into any of the mutual funds. Mutual Funds are managed by fund managers who are proficient in this field. They invest the capital in those healthcare stocks which have a high probability of outperforming compared to other healthcare stocks.

Some of the well-performing Healthcare mutual funds in the U.S.

Fidelity Select Medical Equipment and Systems Portfolio and Vanguard Health Care Fund

These mutual funds mainly focus on investing in Research and Development (R&D) healthcare companies, manufacturing and sales of medical equipment companies.

T Rowe Price Health Sciences Fund
This fund has around 140 stocks in its portfolio, and primarily invests in mid and large-cap companies involved in R&D, production and distribution of healthcare products and services.

Healthcare sector ETFs

Investors who are willing to invest in the healthcare sector directly into the market can consider investing in the ETFs as it is no different than investing in a stock. Also, an ETF keeps a track on the entire sector providing diversity in a portfolio. For example, iShares U.S. Medical Devices ETF, ProShares UltraShort Nasdaq Biotechnology ETF, and Invesco S&P SmallCap Health Care ETF are some of the top performing ETFs in the United States.

The Bottom Line

Healthcare is that sector in the market, which can generate remarkable profit. However, this requires a lot of information about the sector prior to investing, as several factors affect the stock prices. Also, this sector is significantly vast, which comprises of many large and small companies of different industries. Therefore, to bring down the burden in researching about the sector, one can consider investing in the healthcare mutual funds and even healthcare ETFs for that matter. This can reduce volatility as the funds are invested in a set of companies. This also makes a portfolio much more diversified.

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