By Caroline Grimont
Though we’re only 5-years into the decade, there can be no doubt that one of the defining features of the 2020s was how it began – with the COVID-19 global pandemic, related lockdowns, and the economic impacts that can be felt even 5-years later. Very few people in Canada can claim to have been left unscathed in anyway by the pandemic, but that’s not what we want to discuss today. Instead, let’s talk about one aspect of this time that briefly brought most of the world together – the healthcare sector.
Starting from the extraordinary work by medical professionals in the early days of the pandemic, to the development and distribution of the vaccines, which some have called a triumph of science and collaboration, the healthcare sector, both in Canada and globally, came onto the radar of all – and that includes investors. This interest continued past the disastrous year for the sector in 2023, and caught back up to the boom of diabetes/weight loss drugs, including blockbuster releases such as Ozempic, WeGovy and Mounjaro.
As a result of all this, healthcare stocks have soared over the past five years, with some like Eli Lilly (NYSE: LLY) and Novo Nordisk (CPH: NOVO-B) up multiple 100s of percentage points in the time.
Of course, investors see these gains and want to jump in as well, but it is important to know that sector investments, whether they are banking, finance, technology, energy, telecom, healthcare, or any other, can be hard for retail investors to consistently gauge accurately. For one thing, investors need to first decide if the sector of their choosing is the right one in the first place, and then need to look for specific investment opportunities within the sector. It is hard for someone with no training in this field, and with limited time, to accurately make these decisions.
There is one way to avoid some of the guesswork. If an investor wants to participate in a sector in which she thinks there is growth potential, she might consider a mutual fund, or a product that is often more affordable, more liquid, and easier to access, such as exchange-traded funds (ETFs.) And investors have expressed interest in the medical sector, with searches for “healthcare ETFs,” “best healthcare ETFs in Canada,” and “healthcare sector ETFs” on the rise.
If an investor is looking for a healthcare sector fund that is more affordable relative to many mutual funds, has exposure to some of the world’s largest names in the healthcare space, is easy to access, earns income, and has liquidity, she could consider the Harvest Healthcare Leaders Income ETF, ticker HHL.
What is HHL?
The Harvest Healthcare Leaders Income ETF is an ETF that holds 20 stocks of large-cap US Healthcare companies in an equally weighted portfolio – meaning that every stock in the fund has the same importance, or weightage. Each of these stocks have been picked for both long-term growth, and monthly income potential.
The portfolio manager of the fund believes that sector growth is driven by three non-cyclical factors –
- Aging population – As people worldwide age, they will spend a lot more on healthcare, and as populations continue to age, this trend will likely continue in the short and medium-term,
- Growing wealth in the developing world – As developing world wealth rises, so too does spending on health, and
- Innovation and technical – Advances in healthcare will continue to lead to new drugs and treatments of diseases.
HHL launched in 2014 and has over a decade of performance history. It holds names like Abbvie, Johnson & Johnson, Novartis, and Eli Lilly.
Annual Performance
As at December 31, 2024
| Ticker | 1M | 3M | 6M | YTD | 1Y | 2Y | 3Y | 4Y | 5Y | 7Y | 8Y | 10Y | SI |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| HHL | (5.39) | (10.42) | (3.74) | 3.90 | 3.90 | 5.25 | 3.97 | 8.60 | 7.92 | 7.97 | 8.64 | 6.90 | 6.69 |
| HHL.B | (2.72) | (4.50) | 1.69 | 13.68 | 13.68 | 9.29 | 9.27 | 12.56 | - | - | - | - | 11.47 |
| HHL.U | (5.24) | (10.15) | (3.22) | 4.79 | 4.79 | 6.07 | 4.71 | 9.19 | 8.76 | 8.84 | - | - | 9.20 |
Source: Harvest Portfolios Group, Inc.
How Does HHL Work?
The over $1.5 billion HHL is one of the largest healthcare ETFs in Canada that owns 20 large U.S. healthcare companies, spread across the pharmaceutical, bio-technology, equipment, healthcare providers, and tools and services spaces. This means that it is diversified across various sub-sectors of the health-care space, offering investors an overall taste of the sector. Diversification is also the only free-lunch in investing, because by spreading risk out across multiple subsectors, investors are to some extent reducing concentration risk.
A recent Harvest Insights piece expanded on this diversification: “Canada lacks the scale and diversity offered in the United States healthcare market. When we look at the S&P TSX Index, less than 0.5% of the Canadian market offers exposure to the healthcare sector. Meanwhile, the healthcare sector in global markets typically makes up between 11% to 15% of the market share.” Read more here.
The companies in the fund are reviewed quarterly, and sometimes, if a company does not meet the financial or other requirements, it is removed. For example, astute investors might notice that household name Pfizer (NYSE: PFE) is not in the fund. It was taken out a couple of years ago, after the manager noticed that it was not meeting the financial targets set out.
Will I Get Dividend Income with HHL?
Canadians love income and dividends, and so, investors would want to know what the income potential of HHL might be. And there’s good news there. HHL uses an active covered call strategy to generate support is monthly cash distributions, and offers both regular income, and growth opportunities. Oh, and investors also receive income generated through dividends in some of the underlying stocks.
As Harvest ETFs explains it, “Covered call option writing is about striking the right balance. At its most basic level, when you write a covered call option, you gain premiums but can miss some market upside.” You can find out more about covered calls here.
The HHL portfolio management team writes call options on up to 33% of portfolio. This helps the ETF generate enhanced cash flows, while also remaining flexible enough to take advantage of short-term market actions and moves. As a result, investors continue to be exposed to potential market upside on over 66% of the portfolio, while gaining consistent monthly cashflow on the remainder.
Also, from a tax standpoint, it is important for Canadian investors to remember that this income received from covered calls is considered capital gains and is not considered interest income. This is important, because 50% of income from capital gains (up to $250,000) is generally tax free, while the remainder is taxed at your marginal rate. However, interest income is taxed as ordinary income.
How Much Does HHL Cost?
HHL has a management expense ratio of 0.99%. For this price, investors get a carefully curated and regularly reviewed portfolio of stocks, along with covered call options written on a portion of the portfolio to ensure monthly income.
How to Buy HHL?
Investors can buy HHL via online discount brokerages, or through brokers. The ETF may be held both in registered accounts such as an RRSP, RESP or TFSA, or in non-registered accounts.
Is HHL Safe?
Investors should remember that this is a fund that invests in stocks, and so its value can either rise or fall. What this means is that investors could lose money, depending on when they buy and sell this ETF.
As Harvest ETFs explains in HHL’s documentation, “One way to gauge risk is to look at how much the ETF’s returns change over time. This is called ‘volatility.’ In general, ETFs with higher volatility will have returns that change more over time. They typically have a greater chance of losing money and may have a greater chance of higher returns. ETFs with lower volatility tend to have returns that change less over time. They typically have lower returns and may have a lower chance of losing money.”
Harvest has rated the volatility of this ETF as medium.
Who is HHL For?
Investors who want to buy into the healthcare sector and also want regular income, should consider HHL. As this fund invests in equities, investors who have a very short-term time horizon should not invest in this fund. HHL is for investors who want to invest for the medium to long-term and looking to receive a monthly cash distributions over that investment horizon.
Disclaimer
Commissions, management fees and expenses all may be associated with investing in Harvest Exchange Traded Funds (managed by Harvest Portfolios Group Inc.). Please read the relevant prospectus before investing. The indicated rates of return are the historical annual compounded total returns (except for figures of one year or less, which are simple total returns) including changes in unit value and reinvestment of all distributions and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any securityholder that would have reduced returns. The funds are not guaranteed, their values change frequently, and past performance may not be repeated. Tax investment and all other decisions should be made with guidance from a qualified professional.
Certain statements included in this communication constitute forward-looking statements (“FLS”), including, but not limited to, those identified by the expressions “expect”, “intend”, “will” and similar expressions to the extent they relate to the Fund. The FLS are not historical facts but reflect Harvest’s, the Manager of the Fund, current expectations regarding future results or events. These FLS statements are subject to a number of risks and uncertainties that could cause actual results or events to differ materially from current expectations. Although Harvest, the Manager of the Fund, believes that the assumptions inherent in the FLS are reasonable, FLS are not guarantees of future performance and, accordingly, readers are cautioned not to place undue reliance on such statements due to the inherent uncertainty therein. Harvest, the Manager of the Fund, undertakes no obligation to update publicly or otherwise revise any FLS or information whether as a result of new information, future events or other such factors which affect this information, except as required by law.
