Can the Telemedicine & Digital Health ETF break its two-year slump?

Acquisitions have fuelled growth in digital healthcare providers so far this year, but these bursts of positivity punctuate an overall decline for the Global X Telemedicine & Digital Health ETF. The telemedicine and digital health fund is in the red year to date, with a mixed holdings performance. Nonetheless, the strong investment appetite for healthcare and growing commercial appetite in the segment are causes for optimism.

The Global X Telemedicine and Digital Health ETF [EDOC], which listed during the Covid-19 pandemic, has been stuck in a downtrend for the past two years, outpacing even the broad market decline.  

The fund has fallen 31.8% year-to-date as of 23 September, roughly on par with the 30.5% decline of the Nasdaq Composite [IXIC] and underperforming relative to the S&P 500 [GSPC] decrease of 22.5%.

The fund has been on a downward spiral since February 2021, when its price peaked at $23.04. Its 23 September closing price of $11.28, less than half of this value, reflects challenges for the industry as Covid-19-related restrictions and the demand for remote medical services ease in some locations.

The fund invests in companies with the potential to capitalise on advancements in telemedicine and digital health, such as those engaged in telemedicine and healthcare analytics, including connected healthcare devices and administrative digitisation.

Top holdings in EDOC underperform

On a sector basis, 98.3% of the fund’s weight is in healthcare, with consumer defensive comprising a little under 1.4% as of 26 September. Top holdings include Masimo [MASI], One Medical (1Life Healthcare) [ONEM], and Change Healthcare [CHNG] as well as healthcare ventures from two of China’s tech giants: JD Health [6618.HK] and Alibaba Health [0241.HK]. These five stocks have had very different fortunes thus far during 2022, highlighting volatility in the sector at large.

The share price of California-headquartered Masimo dropped on 16 February in response to its agreement to purchase audio products developer Sound United. The stock closed 37% lower the day after the announcement, with analysts uncertain where the purchase would align with the company’s strategy. On 23 September Masimo, which comprises 5.77% of the ETF holdings as of 26 September, closed marginally below the 16 February level with a 51.4% year-to-date decrease.

Experiencing a 26.9% contraction for the year to 23 September, the relative share price of JD Health has outperformed the fund. Alibaba Health, however, has decreased 44.6%. It had been on an upwards trajectory until July reports that representatives from Alibaba Cloud, another player in the Alibaba Group [9988.HK] ecosystem, had been questioned regarding a data hack appeared to spook investors.

September lockdowns to combat rising Covid-19 cases in China have not helped the recent performance of these stocks. As of 26 September, JD Health and Alibaba Health have a combined weight of 8.62% in the portfolio, larger than any individual holding and highlighting EDOC exposure to volatility in the Chinese market. The ETF’s 6.9% slide during 16-23 September could in part be attributed to a decline of 8-9% for each of these two stocks.

UnitedHealth and Change Healthcare lift fund

Some of the Global X Telemedicine & Digital Health ETF’s holdings have defied the negative trend among technology and healthcare stocks during 2022.

The Change Healthcare share price has gained 27.8% year-to-date as of 23 September. The health-tech stock received a 6.4% boost on 20 September when a US federal judge approved a $13bn acquisition by UnitedHealth Group [UNH]; the boost, however, was insufficient to prevent the fund slipping 0.7% for the day.

One of the largest upticks in the fund so far this year has been the 69.4% gain by technology-powered primary care provider One Medical on 21 July, also in response to news of an acquisition. In this instance, the buyer was Amazon [AMZN], revealing plans for an all-cash deal worth $3.9bn. This time the fund saw the results, gaining 3.9% that day.

This underlines the potential for reinvigoration in the technology and healthcare segments to drive robust performance of the Global X Telemedicine & Digital Health ETF in the months ahead.

China to spearhead growth in digital healthcare

According to Marc Häfliger, head of global equity strategy at Credit Suisse, a focus on digital healthcare and a heavy weighting in China could prove advantageous going forwards.

“We still prefer the US and Chinese equity markets,” he wrote in a 12 August report. “Our preference for China is driven by the country’s supportive fiscal and monetary policy.”

He added that the bank expects “superior earnings, margin stability, solid cash flow generation and low leverage” to drive the IT sector. He highlights healthcare as an ideal defensive sector, owing to “better fundamentals such as valuation” compared to consumer staples.

Combined with ongoing commercial appetite in the healthcare technology segment, these factors could signal some cause for optimism among Global X Telemedicine & Digital Health ETF investors in the coming months, particularly when Covid-19 restrictions in China ease.