JONATHAN NEEDHAM: Well, hello. And welcome to TDAM Talks ETS. My name is Jonathan Needham, and I am an ETF specialist here at TD Asset Management, a.k.a, TDAM. Today, I have the pleasure of discussing a very innovative ETF from TD, the TD Global Health Care Leaders Index ETF. To help me do that, I have a special guest, Tarik Aeta, Portfolio Manager and Global Health Care Analyst here at TD Asset Management.
Now, Tarik, really glad to have you here today, and no one better to have to do a deep dive on the health care industry and our new ETF. But before we dive in, can you let our audience know a little bit more about yourself and your history here at TD?
TARIK AETA: Yeah. So thanks, Jon, for having me on. So yeah, I joined TDAM straight out of university just about nine years ago and was lucky enough to join the rotational program, which was great, as it gave me the chance to work across many areas of the organization. But that said, at heart, I've always been a bookworm and always passionate about learning and research. So six years ago, when the opportunity presented, I was fortunate enough to join the Fundamental Equity team, where I cover the health care sector now.
And this includes everything from pharma and biotech, medical devices, life science tools, and health care services. And given just how quickly the health care sector is always evolving with new innovations coming to market all the time, there's never a dull moment, lots to learn and absorb. And it's really been an amazing journey.
JONATHAN NEEDHAM: Awesome. Well, thanks for that. Hand-picked talent straight out of school, I like it. I'm a huge fan of our rotational program here at TD. It really sets one up for success, both the individual and through TD. So an impressive background. We're lucky to have you.
Now, let's kind of get to the matter at hand here. You know, TD Asset Management launched TDOC in mid-April of this year. That's our TD Global Health Care Leaders Index ETF. Now, before diving a little deeper into the ETF, let's first take a little-- a 10,000-foot view here. And can you talk to us a little bit about why investors should care about health care in general?
TARIK AETA: Yeah. So that's a great question. And I would say there are a couple of reasons why investors should pay attention to the health care sector. Firstly, when we do take that 10,000-foot view and even zoom out beyond investment implication, our personal health, at the end of the day, is our greatest asset. Good health gives us hope. It opens doors to pursue our passions and allows us to enjoy life to the fullest. As such, health care has been really codified as a human right around the world, with governments, individuals, and corporations investing ever greater amounts into health care.
So when we take it back into the world of investing, health care, as a result, benefits from many attractive qualities. So this includes strong growth, inelastic demand, low sensitivity to the economic cycle. And combined, these factors have allowed the sector to post stronger earnings growth than the broader market over the decades while also having less earnings volatility than the broader market, which is something few sectors can claim.
And then, the second reason investors should care about health care has to do with the fact that it is a growing part of the global equity market. Using the S&P 500 as a proxy, health care today is 13% of the equity market, making it the second largest sector, only after technology stocks. And for Canadian investors, given there's just so few investment opportunities in the sector here at home, the importance of looking to the US and internationally for those opportunities is just that much more important. So definitely a very important sector for investors.
JONATHAN NEEDHAM: Yeah, thanks. Thanks for the backdrop. I mean, a very compelling thesis and an opportunity for Canadians who, quite frankly, tend to have a lack of exposure to the health care sector here at home, with our Canadian home bias and our equity bias, if you will. So appreciate that backdrop. And you know, what is wealth without health? And so, it's a really, really important sector and continues to be a growing sector in the marketplace. And obviously, as we kind of accumulate our wealth over time and start to kind of spend that wealth, we want to continue to be healthy so that we can enjoy the wealth that we created and all the hard work that we've done over the years to kind of create that wealth. So very interesting background, very compelling thesis.
Now, let's get a little bit into some of the work you've done here at TD. I know alongside the launch of the ETF itself, you recently published an article which, for our listeners who are interested, you can find it at TD.com/ETF, and click on the Insights tab. And this article really kind of outlines the drivers of growth for the health care sector. So to summarize, what have been the key drivers of growth for the sector from your perspective?
TARIK AETA: Yeah. So when we boil it all down, it comes down to two very, very simple things that have driven the strong growth of health care. The first is a growing and aging global population. Here at home in Canada, for instance, total population growth is at roughly 1% a year. But when you look at adults over 65, that cohort is growing three times as fast, at 3% per year. And as we all grow older, we all consume more health care services.
And the second driver of growth, which arguably is even more important, has been innovation. And the reason innovation has been so powerful in health care, just like it has been in technology, is because it opens up new markets where there are unmet consumer needs. For instance, in the world of technology, ecommerce and smartphones barely existed 20 years ago but have since filled large consumer needs.
Similarly, in the world of health care, innovations such as robotic surgery, DNA sequencing, clear aligners, transcatheter heart valves, and many new cancer and immuno-oncology drugs didn't or barely existed 20 years ago. And for the companies that are launching these products, they benefit tremendously from all this green field potential over here.
And to contrast that, one example I like using sometimes is just imagine you said you were running a company that produces a mature product, like a cookie manufacturer. People aren't eating more cookies each and every year. In fact, many people are eating a bit less. So the only way one can grow is by taking market share, which is a much harder thing to achieve than simply expanding into a new market with nascent demand. So with health care companies continuing to spend more on research and development each and every year, the pipeline of innovation remains robust and will remain robust for many years to come. And over a multiyear period, this should allow the sector to continue to perform very well.
JONATHAN NEEDHAM: : It almost feels like you're here in my home, Tarik, because my kids were complaining today on their lunch break for school that I had no cookies. And the reason why I don't have any cookies is because I have a sweet tooth, and so if I have them here for them, I tend to be the one that eats them all. And I got to be taking care of my health as I kind of age. As you can probably tell, I've been in this industry for a couple of decades. And so I'm trying to watch, you know, how much cookies and how much sweets I have. So thanks for that.
A lot of additional supportive points for why one needs exposure to health care companies. Obviously, the demographic change, the exciting stuff that's happening in innovation, and the acceleration of that that we've certainly seen in the last year and a bit with this pandemic. And so, you know, you've mentioned some of these kind of powerful tailwinds of innovation, how they've been over the last few decades, how they're looking kind of in the years going forward. Where do you see the innovation taking place in particular?
TARIK AETA: Yeah, so, yeah, when you look forward to the next decade, innovation will remain a big driver. And I think it'll come down to six big themes, the way I see things. So the first two relate to genomics. So this includes genomic-based diagnostics, so a big focus here on cancer screening, prenatal screening, carrier screening, and also genomic-based therapies. So mRNA vaccines, for instance, have been a very good example of that over the past year. But this field also includes stuff like gene therapies, cell therapies, and even personalized cancer vaccines.
Moving along, the third bucket of innovation I'd call out is further innovation in small molecule and antibody-based drugs. This isn't a new technology, but it is being applied to new problems, so areas like cancer, obesity, mental health, and rare diseases.
The fourth bucket I'd call out it is virtual care. So this has grown rapidly under COVID and will continue to grow in the years ahead. Prior to COVID, telemedicine was still fairly niche. It accounted for just 3% of doctor visits. And while some of these gains in the pandemic era will reverse post-pandemic as some patients may prefer going physically into a clinic, that said, in the long run, expect telemedicine is here to stay, just in the same way ecommerce as an option will likely exit higher the pandemic than we saw it coming into the pandemic.
The fifth bucket of innovation I'd call out are intelligent medical devices. So this includes everything from robotic-assisted surgery, which is still in the early days, and on the consumer side, includes things like continuous glucose monitoring, which can monitor your blood sugar level 24 hours a day for those with diabetes and then send alerts directly to your smartphone when you fall out of range.
And last but not least, the final bucket of innovation, and the most nascent of them all, revolves around computer-aided drug discovery. This is where we can leverage the power of modern day computing to discover more drugs more quickly and at lower cost. So another very interesting area to follow.
JONATHAN NEEDHAM: Some cool stuff, really some kind of amazing innovations here. I certainly see an acceleration of these innovations. It gives me a lot of hope for the future, to be quite honest. And thanks very much for kind of breaking it down into those six verticals-- very helpful for us to pick out those kind of thematics that we see or kind of long-term secular trends.
Now, out of those, so that brings me to my next question here, out of all these innovation verticals, which are you most excited about in the years ahead?
TARIK AETA: Yeah, so-- yeah. I would say genomic medicine is the one that gets me the most excited. And, as I'm sure you remember from high school biology class, the genome is just simply a fancy term that refers to all our DNA. And then genomic medicine is using that science to create new screening tools and new drugs with it.
If we roll the clock back to 2003 with the Human Genome Project, so the sequence of the first human genome took 13 years and $3 billion to basically read all your letters of your DNA. But fast forwarding to today, we can do this in a matter of hours and for less than $700.
And this lower cost is finally allowing genomics to find its way into the clinic instead of just being a fancy science project in the towers of academia. And one area this will revolutionize the next 10 years is cancer care. And this is important because here in Canada, nearly one in two Canadians will be diagnosed with cancer at some point in their lifetime, and nearly one in four Canadians will succumb to cancer.
So to tackle this, many companies are developing genomic-based cancer screening tests. So instead of today, where we're only able to screen for a handful of cancers such as breast or colon cancer, the goal would be to screen for more cancers in the future. So, for example, in the future, as part of your annual physical, we may be able to conduct a blood test that would allow us to scan for micro fragments of cancer DNA that are floating around in your blood. This would allow us to catch more cancers early, when they could be more easily treated, and materially improve cancer survival rates.
I'm sure you know the expression, an ounce of prevention is worth a pound of cure. So if we can develop a blood-based cancer screening test which is effective against all cancers, it would really revolutionize cancer care. And all the data suggests that this is simply a matter of when, not if, with each subsequent generation of the technology getting us closer to that holy grail.
JONATHAN NEEDHAM: You got me excited. I mean, some of these themes hit very close to home for many of us. And so the possibilities that they present to solve some of these problems that we've had for multiple decades, and at the speed, and at the lower cost that we're seeing today and in the future is exciting stuff. I mean, not just from an investment perspective but from a personal, and a life-- and a quality of life perspective. So thanks very much for sharing all of that and giving us that kind of backdrop.
So let's get to the ETF now. To help set the stage for how our ETF is different, would you mind giving listeners, first, an overview of the three major buckets of companies in the health care industry and which we like more than others?
TARIK AETA: Yeah. Yeah, so even though there are thousands of publicly traded health care companies, at the end of the day, it's quite simple. They all really fall under three buckets. This includes the companies are discovering drugs, the companies are developing widgets, and the companies are delivering services.
So when it comes to the companies that are discovering drugs, this includes your pharma and biotech companies. But for the mega-cap drug companies, it is a tough business, as they are constantly running on this treadmill of patent expiries, with internal R&D often having a hard time keeping up. So as such, we've designed the ETF to tilt exposure away from the mega-cap pharma companies and instead own more of the mid and large cap names, as well as the biotech names, where there's stronger growth potential.
In the second bucket are the companies that are developing widgets. So this includes your medical device manufacturers such as those that make pacemakers, artificial heart valves, surgical robots, and so on and so forth. And the reason we like these names a lot is just because they benefit from the same secular tailwind. And so demographics, they benefit from innovation. But they don't have the drug discovery risk or the patent expiry risk that you get in pharma and biotech. So as such, you get a lot of high quality, consistent growers in this space.
And another great group of companies you also get are the life science tool companies. And these basically make the picks and shovels that are required to discover and manufacture drugs. So if you look at the COVID vaccines, for instance, they make the big tanks where you produce the vaccine in, the filtration equipment to produce those vaccines, the cell culture media that goes into these tanks, and the fill and finish capacity to put the vaccine into vials. And basically, what makes this group attractive is that no matter which pharma or biotech company discovers the next big drug, the tool industry basically always wins, as they're basically supplying all the pharma and biotech firms across the board.
And then, yeah, the last company I'd like to-- the last bucket I'd like to call out are the companies that are delivering services. So this includes the health insurers, clinics, diagnostic labs, telemedicine companies, to name a few. And then the nice thing about this group is they benefit more from the volume growth and demand for health care without having to take a bet on R&D risk, unlike other areas of health care.
JONATHAN NEEDHAM: Thank you. I think, from what I heard there, there's a couple of really great benefits to owning the TD Global Health Care Leaders Index ETF. I think, first and foremost, you know, Canadians have a lot of choice but not a lot of choice that goes global. Most mandates that are available to them are just getting that exposure to the US health care. And so kind of broadening of that spectrum is obviously diversifying the portfolio and giving them more opportunities for better outcomes, first and foremost. So diversification matters across all those verticals.
I think you talked about the restriction or the potential restriction of growth on those mega caps. And so our ETF having that 2% cap on any one security gives it-- allows it for the winners to keep winning, if you will, but at the same time, capping that exposure to the mega caps that may have slower growth than some of those kind of mid to smaller cap companies.
And then I'll have to mention here, at 35 basis points, we are the lowest cost health care ETF in the Canadian marketplace. And so I think, again, you know, we've come to the street with your input and with some partnership with Solactive here, out of really kind of leading global health care strategy for Canadians.
And I think if you could maybe dive a little bit deeper, because I'm very passionate about the need or the desire and the better outcomes that global can achieve for clients in the context of their portfolio. In this ETF, you know, anything specific that stands out in terms of the benefits of being global versus just tied to US health care?
TARIK AETA: Yeah, so definitely by having a global focus, you get exposure to certain pockets that may be underrepresented in the US. So for example, when it comes to medical imaging, such as MRIs and CT scans, two of the big industry leaders globally, such as Siemens Healthineers and Philips are headquartered in Europe. Similarly, when it comes to diabetes, a company like Novo Nordisk, which is headquartered in Denmark, the world leader in that space. So again, if you have a US-focused fund, you wouldn't get exposure to that name as well. And just basically, yeah, there's many, many other examples like these. Yeah, and roughly half of all the companies in the ETF are international names outside of the US market.
JONATHAN NEEDHAM: Perfect. Thanks for that. I think, in your paper, from what I remember, you continue also there to argue while diversification is always important, it's even more important when it comes to the health care sector. And I think you've covered that, but is there anything else you wanted to capture that you didn't in the last comments there?
TARIK AETA: Yeah, I guess. So while health care on the whole has grown at a pretty consistent clip over the past few decades, that said, when you under the hood, there's a very big gap between the winners and the losers. For instance, in biotech, it's not uncommon to see a stock decline one day 50% because it fails in clinical trials or its stock can double one day because it has had successful clinical trials. So, compared to the broader US stock market, the health care sector definitely sees many more big winners but also sees many more big losers as well.
And basically, the way the numbers shake out is that over the past decade, 26% of health care companies have generated negative returns, so definitely a higher failure rate than your average US stock. But on the other hand, 15% of health care stocks have delivered over 1,000% returns, so basically multiplying your investment 10x over a decade. So, while diversification is always important, I would argue in the world of health care, it's even more important, given just the wide range of possible outcomes that we see in this sector.
JONATHAN NEEDHAM: Sounds like we've done a really good job of managing risk here, taking, I'll say, a larger number of small bets as opposed to concentrated bets that can go your way but can certainly go against you very easily. So thanks very much for that. I think it's important for us to continue to tell our investor community, whether it's the end investor or advisor community, the merits of going global, the merits of being globally diversified and taking that large number of small bets, and then having a lower cost hurdle so that you can have a better outcome overall and better compounding growth over time.
From your perspective, Tarik, what would you say is the biggest risk to investing in health care?
TARIK AETA: Yeah, so the Achilles heel of the health care sector is really just one thing. It's the strong dependence the sector has on the US market. And to put it in perspective, the US accounts for less than 5% of the world population and 24% of global GDP. But when it comes to health care, the US makes up 40% of global health care spending and 50% of global patents and drug spending. So given the US government controls 40% of health care spending through programs such as Medicare and Medicaid, it's always very important to keep a close eye on the US political and regulatory landscape, as changes here can really have a big impact on the sector.
JONATHAN NEEDHAM: Yeah, we've seen that in the past. We'll probably see that in the future. And again, I think it kind of helps reinforce why going global, why having a diversified portfolio to mitigate some of those political risks, although you can't obviously remove them entirely. So you know, we covered a lot of ground in a short time frame. Is there any other areas missed that you think are important to our viewers that we should know before we wrap it up?
TARIK AETA: Yeah, I think we covered all the key points. I just like to reiterate that, yeah, health care is a very attractive sector. It benefits from sticky demand, demographic tailwinds, a long runway for continued innovation.
And then when it comes to the TD Global Health Care Leaders Index ETF, we really have a unique solution here, providing broad-based access to the health care sector, global access, as well as holdings that are tilted towards the attractive and higher growth areas of the market, and again, with the lowest management fee for any health care ETF here in Canada.
JONATHAN NEEDHAM: Yeah, thanks, Tarik. I think, for those of you listening in today, I've been dealing, and working with, and partnering with financial advisors for about 25 years of my career. And this particular strategy, they are thrilled that we've launched in the Canadian marketplace. Our early feedback has been high adoption rates. We're seeing most advisors are looking at about a 5% allocation within their portfolios. And so they're thrilled that we've brought a global mandate to the Canadian marketplace, so thanks for your input on that. Thank you so much for taking the time today to dive into this new ETF.
For all you listening, we thank you for tuning in. For more information on our ETFs, please visit TD.com/ETFs, and follow us on Twitter, @TDAM_Canada, or LinkedIn under TD Asset Management, to stay up to date on all the ETF-related podcasts, blogs, and much more. Lastly, if you have any comments or suggestions on what you'd like to hear more of, please email us at TD.TDAMTalks@TD.com. Thank you all again. Thanks again, Tarik. Thanks, everybody. Have a wonderful day.
