Aging Stinks, So You May As Well Make Some Money From It

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Seniors communicating.
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By Constance Gustke

The U.S. population is getting grayer. Learning how to profit from an aging demographic can be a minor form of consolation set against time's merciless tick-tock.

Playing population trends is a foundation for many investable themes -- for example, the population boom in the developing world and the rise of its consumer class. The so-called gray wave in the U.S. will continue to grow, too. Currently, 13 percent of the U.S. population is 65 or older, according to U.S. Census data. By 2030, that number will rise to 18 percent of the nation as 10,000 baby boomers retire every day up until then. They'll need new knee replacements, along with an array of new and old drugs as they age.

Investors will benefit from this graying of America, and exchange-traded funds are a diversified way to target the trends associated with an aging demographic.

Neena Mishra, director of ETF research at Zacks Investment Research, pointed to pharmaceutical ETFs. They're slated to prosper as demand for drugs grows in the U.S., as well as in emerging markets.

One reason Mishra likes pharmaceutical ETFs is because they have a more stable profile than biotech ETFs, while offering growth potential.

Mishra recommends the PowerShares Dynamic Pharmaceuticals Portfolio ETF (PJP), the largest in the group, with $1.13 billion in assets. Big U.S. drug companies, including Johnson & Johnson (JNJ), Merck (MRK) and Eli Lilly (LLY), are among the top holdings, but there are also some biotech firms, including Biogen Idec (BIIB) and Amgen (AMGN).

"This ETF isn't plain vanilla," Mishra said. "It selects and weighs companies based on targeted criteria, like earnings." The strategy has worked well, she said, noting that the ETF is up 12 percent so far this year and 40 percent in the past one-year period.

SPDR S&P Pharmaceuticals ETF (XPH) is another Mishra pick. It has a mix of big, medium and small pharma companies. Its top holdings include Questcor Pharmaceuticals (QCOR), Allergan (AGN) and Akorn (AKRX). "Most of the holdings are known companies, though," Mishra said. This ETF also has a lower expense ratio than the PowerShares ETF -- 0.35 percent vs. 0.63 percent for Powershares Dynamic Pharmaceuticals. And it has performed slightly better this year, up 15 percent.

Morningstar (MORN) fund analyst Robert Goldsborough said diversified health care ETFs are a more diversified way to gain exposure to drug companies. The Health Care SPDR (XLV), which has near $10 billion in assets, has drug companies Johnson & Johnson, Pfizer (PFE) and Merck among its top holdings, along with insurance plan providers, like UnitedHealth (UNH). Goldsborough also highlighted the Vanguard Health Care ETF (VHT), which also has big drug company holdings.

How many people will need knee replacements in the next 10 years alone? The explosion is huge.

These funds are inexpensive and cover every part of the health care sector, too, including biotech, he said. XLV has an expense ratio of 0.16 percent; Vanguard's VHT has an expense ratio of 0.14 percent. Returns for these ETFs aren't as strong as for the more concentrated bets -- not surprising, given the greater diversification across health care stocks. XLV is up 9 percent year-to-date and 24 percent in the past year, while VHT has slightly outperformed its peers in the past year with a return of 26 percent -- at a slightly lower management fee.

For a more concentrated health care bet, Goldsborough likes biotech ETFs.

"There's lots of growth and mergers and acquisitions in this niche," he said. IShares Nasdaq Biotechnology Index ETF (IBB), which has more than $5 billion in assets, is worth considering, he said. It owns big biotech stocks, including Amgen and Biogen Idec, but "smaller upstarts sit shoulder-to-shoulder with big companies in this ETF," Goldborough explained.

SPDR S&P Biotech ETF (XBI) is a similar ETF.

IBB has an expense ratio of 0.48 percent; the SPDR biotech ETF has an expense ratio of 0.35 percent. IBB is up 10 percent year-to-date and 42 percent over the past year, matching returns of the pharmaceutical ETFs. XBI has been the winner in recent history, up near 18 percent this year and 44 percent in 2013 -- at its lower expense ratio of 35 basis points.

Biotechnology stocks have been hit hard in the past three months, "but there's a bright future for biotech, since the world needs innovative therapies," Goldsborough said, adding that he sees the biotech setback as only temporary.

Banking On Knee Replacements

To avoid the high-profile, high-risk biotech sector, Gary Gordon, president of Ladera Ranch, California-based Pacific Park Financial, recommends lesser-known, cheaper sectors, like medical devices. The only downside: There is just one ETF offering -- the iShares US Medical Devices ETF (IHI) -- which holds medical device companies, including Medtronic (MDT), but also has big pharma company Abbott Laboratories (ABT) among its top holdings.

The reason for owning this ETF is clear, as far as Gordon is concerned. "How many people will need knee replacements in the next 10 years alone?" Gordon said. "The explosion is huge."

IHI has an expense ratio of 0.46 percent. Year-to-date it is up 10 percent and close to 29 percent over the past one year -- though that could be considered pricey for an ETF that has an expense ratio three times that of the broadly based health care ETFs with a similar recent performance profile.

Gordon also likes bond ETFs as people age and pursue yields. One pick is SPDR Nuveen Barclays Capital Municipal Bond ETF (TFI), where bonds are held to maturity. "That tactic takes away the risk of bond price collapses," he said. Its expense ratio is 0.23 percent. This ETF has doubled the 2 percent return of the iShares Barclays Aggregate Bond Fund (AGG) so far in 2014.

Lastly, consumer discretionary ETFs are worth looking into, said Mohit Bajaj, director of ETF and portfolio trading services at New York City-based WallachBeth Capital.

"As people age, they have more disposable income," Bajaj said. PowerShares Dynamic Leisure & Entertainment (PEJ) holds big hotels, restaurants and travel company stocks. Bajaj also likes Market Vectors Gaming (BJK), which holds big gaming stocks, along with hotels. "It's the main gaming ETF out there," he said.

PEJ has been the less volatile of the two consumer ETF plays -- flat this year and up near-20 percent over the past one year -- while BJK is down 9 percent this year, though it has returned 17 percent over the past one-year period. Net expense ratios are similar: 0.63 for PEJ and 0.65 percent for BJK. Las Vegas Sands (LVS) -- BJK's top holding -- is the only gaming company among PEJ's top 10 stocks.

Even though aging is a sure thing, investing in the gray wave is uncertain and faces a short-term headwind that all stocks are contending with. "With the stock market at all-time highs, you can't just plug into a theme and everything's fine," Gordon said, though he does believe that over the longer run, some ETFs will benefit.


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25 Comments

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Stephen

Getting old really isn't that bad. The worse thing about aging is seeing the American society and values deteriorate right before you very eyes. As you age, life in this country barely resembles what it was when you were younger. Pretty soon, you will be less concerned about death..because life just isn't the same as it was when you enjoyed it.

July 20 2014 at 7:55 AM Report abuse rate up rate down Reply
victoriagolfgirl

I've spent 30 of widowhood having an wealth advisor. Made money, luxuries sold off, need little any more. So I'm in the bank for 1%. Very safe.
Investments are now in health and life insurance plans. Thank you, Paine Webber!

June 25 2014 at 6:02 PM Report abuse rate up rate down Reply
sal_homero

All must be oriented to a good, if possible confortable aging... not only the bussiness

June 25 2014 at 3:55 AM Report abuse rate up rate down Reply
toosmart4u

Hey Ted, hope you are not counting social security and medicare in your entitlement programs. Social security is paid for by all employees and employers. Granted everyone is living longer so the trustees reported a 25% cut in benefits in 2033 if nothing is done to shore it up. Now people if you are on social security and medicare thank a democrat, if you want to end these 2 fine programs vote republican, for they tried to get rid of these 2 programs in 1935 and 1968 when they became law, just like today to get ride of Obamacare.

June 24 2014 at 8:59 PM Report abuse +1 rate up rate down Reply
brandma6585

That's what we are here for - to age so you young ones can make money off of us. Just keep the retirement checks coming! People think SS is in trouble? Naw, grandma needs a new knee - chargeeeeeeeeeeee!

June 24 2014 at 7:44 PM Report abuse rate up rate down Reply
Dan

i guess I've done worse things with my life than becoming a stimulus for the future economy. It's either gear up to take care of us old folks or start another war somewhere to stimulate jobs. Personally I'd prefer not to get another 10 year war started. That's what has really put us behind the eight ball. Our great-grandkids will be paying for past wars. Oh well!

June 24 2014 at 4:43 PM Report abuse +2 rate up rate down Reply
Iselin007

The constant flight from high taxes,outsourcing, visa workers ,and part time crap jobs will eventually be the final nail in this economy. The Great Recession will ruin many retirements and end many futures of younger people.

June 24 2014 at 4:24 PM Report abuse +1 rate up rate down Reply
hambrock7

Goin6 down fightin

June 24 2014 at 3:06 PM Report abuse rate up rate down Reply
Iselin007

I just wonder about the young thugs, they'll have only themselves to abuse, assault, and plot against after were gone. Real proud of yourselves. Arent you?

June 24 2014 at 1:35 PM Report abuse +4 rate up rate down Reply
Iselin007

I'm sorry that I had to go an age and ruin your day.

June 24 2014 at 1:24 PM Report abuse +1 rate up rate down Reply