IHI: Standout Performer With Strong Future Growth Prospects (NYSEARCA:IHI)

iShares U.S. Medical Devices ETF (IHI) is an exchange traded fund launched by BlackRock, Inc. and is managed by BlackRock Fund Advisors. The fund invests in public equity shares of companies primarily engaged in healthcare equipment and medical devices. It has some investments in Life sciences tools & services too. As a long term investment strategy, the fund invests in growth and value stocks of companies, mostly in S&P 500 companies.

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Since its inception in May, 2006, iShares U.S. Medical Devices ETF has been able to mimic its benchmark index – Dow Jones U.S. Select Medical Equipment Index (composed of U.S. equities in the healthcare equipment and medical devices sector). Over the past 10 years, IHI has generated a very healthy return in the range of 21 to 26 percent. IHI has a beta of 0.76 (against S&P 500), which suggests it is a less risky fund. IHI also pays quarterly dividends on a regular basis. However, the yield is extremely low – less than one percent. This implies that this ETF is suitable only for growth seeking investors, not for income seekers.

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iShares U.S. Medical Devices ETF has generated strong sales, and earnings growth, which are also at par with its peers. IHI’s cash flow has grown by almost 32 percent, outperforming its peers with a significant margin. However, its price multiples are on the higher side, when compared to its peers. P/E of 27.27, and Price/Book of 4.43 surely suggests that it has already generated enough interest from investors. Price/Sales is also high at 5.1. However, backed by such strong operating performance and cash flow growth, the investors may not be wrong to expect a more than average growth from this fund. An inspection of future potential of its major holdings thus becomes very crucial.

iShares U.S. Medical Devices ETF is one of those rare healthcare ETFs, which have been able to grow during the pandemic. Healthcare sector as a whole had seen a steep fall in March 2020. IHI suffered a very minimal loss during this pandemic. 26 percent average return during the past three years surely makes it a standout performer. This leads us to further scrutinize its holdings, and understand the reasons behind such exceptional growth.

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As can be seen, the fund has mainly invested in companies engaged in healthcare equipment and medical devices. These are the two healthcare segments that recorded positive and impressive returns in the past one year. Pharmaceutical, Managed healthcare, Biotechnology, and Life care tools & services – all have suffered immensely during the same period. While most of the large companies in these four sectors recorded negative growth, the ones in healthcare equipment and medical devices have stood out. Concentrating on these two segments has surely been beneficial for this ETF, as this fund not only generated a strong return, but also outperformed S&P 500 by a significant margin.

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iShares U.S. Medical Devices ETF has significant holdings (3 percent or more) in 12 companies – Thermo Fisher Scientific Inc. (TMO), Abbott Laboratories (ABT), Medtronic Plc (MDT), Becton, Dickinson and Company (BDX), Boston Scientific Corporation (BSX), Stryker Corporation (SYK), Edwards Lifesciences Corporation (EW), Intuitive Surgical, Inc. (ISRG), IDEXX Laboratories, Inc. (IDXX), Baxter International Inc. (BAX), DexCom, Inc. (DXCM), and ResMed Inc. (RMD). Barring Edwards Lifesciences Corporation, all are healthcare equipment and medical device manufacturers.

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This might be that rarest of funds in which all its significant holdings generated strong growth over the past 5 years. Among these 12, the stock that recorded the minimum growth is Medtronic Plc. However, 31.51 percent growth over the past 5 years is good enough for me in these troubled times. There are stocks like DexCom, Inc., which grew by 427 percent during the same period. This fund has invested more than 30 percent of its holdings only in two companies – Thermo Fisher Scientific Inc., and Abbott Laboratories. These two companies generated a return of 240 percent and 167 percent respectively.

The Covid-19 pandemic seems to have had a positive impact in this sub-sector, due to the increased need for diagnostic and surgical equipment. As people are becoming more aware and healthcare agencies are placing more emphasis on early diagnosis and treatment of chronic diseases, the demand for such equipment will continue to grow. Moreover, the increase in geriatric population, added with growing prevalence of chronic diseases, will lead to significant growth in inpatient admissions, resulting in further demand for diagnostic and surgical procedures. “For instance, an estimated 303 million people in the world were suffering from osteoarthritis of the knee, according to various national and regional databases”.

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All these factors will surely lead to a sustained future growth of medical devices and healthcare equipment. In North America alone, the medical devices market is projected to grow from $455.34 billion in 2021 to $657.98 billion in 2028 at a CAGR of 5.4%. IHI is well poised to take advantage of this growth prospect. Historically, this fund has been one of the best performers, and one of those rare funds to cushion the impact of pandemic. Rather it has been a standout performer and recorded significant growth in the past three years. Not only did the medical devices and healthcare equipment segment witness growth, but also the holdings of IHI have been extremely productive. Investors too, seem to be very optimistic about the future performance of this ETF. As a growth seeking investor, I’d certainly like to keep iShares U.S. Medical Devices ETF on my portfolio of investments.