The Upside to Global Tech and Healthcare Exposure
For Canadians, home isn’t just where the heart is: It’s also where the majority of their investments are. Jon Needham, Vice President, ETF Distribution, at TD Asset Management Inc. (TDAM), notes that the average Canadian has approximately 65%1 of their equity allocation in domestic stocks. By contrast, the market capitalization of Canadian equities represents only about 3%2 of the global total.
Canadians Lack Broad Exposure to Key Sectors
Beyond concentration risk, investors without much of a global equity allocation are handicapping their portfolios.
“The Canadian technology and healthcare sectors offer very limited options for investors,” says Needham. “The more of a home bias you have, the less exposure you likely have to those two sectors. And those two sectors have been some of the best performing sectors over multiple decades.”
Needham argues that these sectors are not about to lose their status as market leaders. He notes that while we are increasingly adopting new technology into our lives, investors continue to underestimate the future cash flows companies in the technology sector generate. Similarly, an aging population across the industrialized world reinforces the need for increased healthcare services. As a result of these two trends, the long-term future of technology and healthcare equities remain attractive.
To tap into these trends, TD launched two innovative index ETFs, one in 2019 and one in 2021, that seek to give Canadians easier and more effective access to these sectors than the existing products in Canada or abroad.
Filling a Market Gap
The TD Global Technology Leaders Index ETF (TEC) invests in global mid- and large-cap tech stocks. Unlike one of the leading tech ETFs south of the border, which also includes names like Costco, Pepsi and Kraft Heinz, TEC is focused exclusively on technology companies. “We found a way to give Canadians better coverage of the technology universe,” Needham says. “Pepsi and Costco are obviously great companies, but they are not pure technology.”
When developing an ETF for the healthcare sector, David Roode, Vice President and Director of ETF Product Strategy says that TDAM didn’t want to replicate the existing healthcare ETFs and indexes because they tend to be overweight slow-growing large pharmaceutical companies. The TD Global Healthcare Leaders Index ETF (TDOC) overcomes this challenge by seeking to track an index which imposes a limit of 2% to any single issuer. The largest constituent as of August 23, 2021 is Moderna, which accounts for only 2.38% of the fund. While the ETF still owns the so-called Big Pharma stocks, it allocates more to mid-large cap healthcare firms that may have greater growth potential.
TEC and TDOC both provide Canadians with global, thematic investment opportunities. Previously, Advisors had to purchase multiple products, sometimes on different exchanges, to get the same exposure. Now they can get these exposures in all-in-one solutions and at a very competitive cost, with both coming in at 0.35% management fee.
Canadian investors also benefit from preferential tax-treatment by using domestically listed ETFs to access these global sectors. It is possible that Canadian estates that own over large amounts in U.S. securities at the time of death can be on the hook for tax liabilities.
Designed for Canadians
“We’re designing products by Canadians for Canadians,” says Roode.
For TEC, more than a third of its assets are in international equities, which ensures Canadians are getting broad coverage, rather than a carbon copy of a U.S. tech index. The fact that these ETFs trade in Canadian dollars is another advantage since it eliminates the need to deal with currency conversion when buying or selling.
Built to Last
The case for exposure to global healthcare and technology companies continues to be strong. The last 18 months have merely accelerated a well-established trend. Given the importance of these two sectors in recent years and their long-term potential, these sectors play an important role in a portfolio.
TEC and TDOC provide investors with a better way to access these sectors over long-term.
Jonathan Needham, Vice President, ETF Distribution, TD Asset Management
David Roode, Vice President and Director of ETF Product Strategy, TD Asset Management
1 IMF Coordinated Portfolio Investment Survey, June 2016
2 Bloomberg Finance L.P., as of August 2021.
3 As of August 20, 2021.
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