HHL: A Healthcare ETF That Has Delivered Monthly Income and Top Tier Growth for Nearly a Decade


January 31, 2024


January 31, 2024


January 31, 2024

By Ambrose O’Callaghan

The health care sector proved to be one of the best paths to growth for investors through the previous decade. This sector was thrust into the spotlight once again in 2020 as the COVID-19 pandemic shook our social, economic, and political fabric. Today, I want to explore how this sector performed in 2023, what funds are worth highlighting in this space, and what investors should expect as we look ahead to the rest of 2024. Let’s jump in.

What happened in the health care sector in 2023?

Coming into 2023, there was considerable optimism surrounding the health care sector. The health care space had come off strong performances in 2020, 2021, and 2022. However, the health care sector suffered the second widest underperformance against the broader market in the past 30 years in 2023. This was a mild shock given the macroeconomic backdrop.

Investors in this space should not despair. The last time we saw health care underperform the broader market to this degree was in 1999. In the next year, healthcare outperformed the broader market by nearly 50%. It is important to note that health care still finished the year in the black, though it lagged the broader market by nearly 25% compared to the “Magnificent 7”.

How did Harvest ETFs’ top healthcare fund perform in this climate?

We are now in the tenth year of the Harvest Healthcare Leaders Income ETF (HHL:TSX). Harvests’ portfolio management team pursues a very structure active process when it pertains to stock selection. It also pursues a structured process on its call option strategy.

North American and global markets have been tricky to navigate since the beginning of the new decade. Over that period, HHL has established itself as one of the top performing ETF in the sector over the past 1, 2, 3, and 4 years as at the end of December 2023.

Beyond that, our portfolio management team believes that writing call options on up to 33% of portfolio helps HHL to generate enhanced cash flows. Moreover, engaging a flexible covered call strategy is a crucial attribute that allows the team to understand potential shorter-term catalysts within equities and take the appropriate to actions monetize its covered call strategy.

There are many variables that are unique to the healthcare sector, which require close oversight by the active managers. For example, active managers must account for the impact of Food and Drug Administration (FDA) submissions, clinical trials, regulatory changes, and other variables. The managers using their expertise will select the right mix stocks to construct and a portfolio that provides the proper diversification and pursue growth. Our portfolio management team in executing the investment strategies for HHL make these active decisions and has the flexibility to replace specific names and reorient toward growth areas while maintaining a portfolio of 20 equally weighted stocks to support HHL portfolio diversification.

HHL: A cash flow champion

Track records take one thing to establish: Time! HHL was launched in November of 2014 and has consistently paid a monthly distribution of $0.0583 per unit since then. In aggregate, that’s over $400 million in distributions to unitholders, a feat to celebrate.  This was aided by applying our tested call option writing strategy that remains flexible, targeted and done on up 33% of the portfolio holdings.  As of January 25, 2024, HHL posted a current yield of 8.51%.

For investors who are hungry for enhanced income from this vital sector, there is also the Harvest Healthcare Leaders Enhanced Income ETF (HHLE:TSX). This ETF is built to deliver enhanced income and growth opportunities by applying modest leverage to an investment in HHL. It offers access to the same portfolio of large-cap US healthcare companies with enhanced monthly cashflow.

This ETF has paid out a monthly distribution of $0.0913 to unitholders since its inception on October 25, 2022. That represents a current yield of 10.5% as at January 25, 2024. Though it is a relatively small sample size, HHLE has also delivered an annualized return of 12% since its inception. That performance, combined with its high monthly cashflow, may entice investors who are hungry for income.

What should investors expect from healthcare in 2024?

There are several key growth drivers in healthcare that are worth getting excited about in 2024.

Artificial intelligence is soaking up a lot of attention in the technology space. Unsurprisingly, that has extended to its potential uses in healthcare. For example, the Mayo Clinic has pointed to AI’s ability to bolster the accuracy of patient diagnoses. One Mayo AI model showed the capability to detect pancreatic cancer on scans earlier than a provider could.

GLP-1s – weight loss drugs has a market potential that is massive and growing. Goldman Sachs recently estimated that the market could reach $100 billion in value by 2035. Indeed, the potential of weight loss drugs goes far beyond the pursuit of aesthetic perfection. GLP-1s could be a game-changer in their ability to improve cardiovascular health results. This drug cohort has also shown potential to help those with sleep apnea.

Bottom line

Healthcare is positioned to benefit from solid growth, strong visibility into ongoing demand, and attractive valuations that followed the second widest lag on an annual basis in three decades. Harvest’s portfolio management team believes the healthcare sector is set up to deliver attractive results given the 2024 outlook.


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