A new book argues that "the next great industries" will be those in the health care, environmental and infrastructure sectors. "The tremendous needs in those areas will drive innovations that could create a boom similar to that from the technology breakthroughs of the 1980s and 1990s," declare Jeffery Feldman and Andrew Hyman in their book, Three Paths to Profitable Investing: Using ETFs in Healthcare, Infrastructure, and the Environment to Grow Your Assets (2010), published by FT Press.
We don't need the financial engineering or fancy formulas of "casino capitalism" to be successful investors, say Mr. Feldman and Mr. Hyman. "In fact, all we need to do is look out the window. If we do, we see that we need to clean up the air, reduce [U.S.]dependence on fossil fuel, make health care affordable and rebuild [U.S.]infrastructure."
The tremendous amount of resources, capital and brainpower directed at these problems are giving birth to a wide range of solutions and innovations. They will fuel a boom that "probably will surpass the 1982-to-2000 bull market led by the information age and telecommunications companies," predict the authors. In their opinion, the next generation of great American companies will likely come from these segments of the economy.
Besides presenting a case for investing in health care, green energy, and infrastructure, Mr. Feldman and Mr. Hyman also discuss at length a wide variety of exchange-traded funds (ETFs) for gaining exposure to these sectors. ETFs are recommended because most of the firms in these industries are still small and risky.
The authors have written a timely book - at least for Canadians. The strong loonie has given Canadians more purchasing power to buy U.S. investments. Their book offers a road map of sorts to Canadian investors looking to increase foreign diversification within their portfolios.
Mr. Feldman lives in Princeton, N.J., and is the founder of XShares Group, a firm that co-launched the first group of target-date ETFs. Mr. Hyman, a resident of Chicago, is vice-president of Private Sector Advisors Inc. and co-author of ETF Strategies and Tactics: Hedge Your Portfolio in a Changing Market.
Growth potential in the three sectors In health care, the mapping of the human genome opens up more cost-effective approaches to treating illnesses. By testing for mutations in certain genes, biotechnology can detect diseases at earlier stages and head off expensive interventions. Biotechnology can also lead to therapies that alter genetic processes to cure a disease - rather than the prevailing model of relieving symptoms through costly drug treatments.
The incentive to get health care costs under control will only escalate as the baby boomer generation moves into its golden years. By 2020, the number of persons over 65 is expected to rise by 35 per cent in the U.S. People over 65 spend 17 per cent of their income on health concerns, while people under 65 spend just 6 per cent. Congress also recently passed legislation to make public health care more universal in the U.S.
In the environmental area, many companies are vying to reduce greenhouse emissions and increase energy efficiency. Alternative sources of energy, notably wind, solar, nuclear, geothermal, and biofuels have significant potential for gaining market share. The emerging technologies include solar modules, wind-turbine systems, rechargeable lithium batteries, light-emitting diodes and methods for extracting gas from shale.
In infrastructure, the need for upgrading is acute. As evidence, Mr. Feldman and Mr. Hyman cite an analysis performed out by the American Society of Civil Engineers: their 2009 Report Card for America's Infrastructure assigned an average grade of D to U.S. infrastructure, ranging from D- in water, wastewater and road systems, to C in bridges.
Health care ETFs In the U.S. health care sector, the book lists nine of the larger ETFs by asset size. The ETFs are sorted into four groups: biotech, health care, medical devices and pharmaceuticals. The health care category is where you can buy the sector in one stop.
It is also where the most liquid and cheapest ETF is to be found: the Health Care Select Sector SPDR ETF. Its annual expense ratio is 0.22 per cent, and over 10 million units change hands daily - about 10 times the second-highest ETF in the sector.
The authors believe that the greatest growth within the health care industries will occur in the biotech niche. "It is likely that biotech companies will develop the drugs that replace those that are coming off patent at the large pharmaceutical companies," reason the authors.
The iShares Nasdaq Biotechnology Index Fund is the largest of the biotech ETFs, covering over 120 companies. Mr. Feldman and Mr. Hyman like it because it gives "exposure to potential blockbuster innovation," yet comes with a better trade-off between risk and reward than the other two biotech ETFs (whose portfolios are subsets of the iShares Nasdaq Biotech Fund). The annual expense ratio is 0.48 per cent.
Green ETFs In the environmental sector, the book identifies seven of the more prominent ETFs. Natural gas, wind, solar and nuclear energy each have an ETF representing them. The rest of the ETFs are in the broader category of clean energy and technologies.
From the latter comes the largest of the green ETFs: PowerShares WilderHill Clean Energy Portfolio. Its annual expense is 0.69 per cent; it invests in over 50 companies.
Infrastructure ETFs In the infrastructure sector, 14 of the largest ETFs by asset base are listed. They are spread across the following categories: general, materials, utilities, water, transportation and REIT categories.
From the general category, the PowerShares Emerging Markets Infrastructure Portfolio ETF is an interesting consideration: as the names suggests, it tracks shares in companies building infrastructure in developing countries. The annual expense ratio is 0.75 per cent.
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