Mon Jun 30 2014
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3 ETFs to Cash in on Aging Global Population

Global population is growing older at an unprecedented rate. The number of persons aged 60 years or more worldwide is expected to increase from 841 million in 2013 to more than 2 billion by 2050 and their share will almost double from 11.7% to 21.1% during this time period, according to the UN’s “World Population Ageing” report.

Aging is a global phenomenon and while most developed countries already have relatively aged population, older population in developing regions is now growing faster than in the developed regions. In China, for example, the number of older people will increase by over 32% between 2012 and 2020. (Read: Beat the Market with Fundamentally Strong ETFs)
Declining fertility rates and rising longevity trends around the world will likely pose some challenges for future economic growth but at the same time they create some opportunities for investors.
Investors could consider ETFs that are likely to benefit from the world’s rapidly aging demographic trend.  Most investors think of healthcare focused stocks and ETFs but there are some other ETFs too that will benefit from the ‘silver’ economy.

Pharmaceuticals: PowerShares Dynamic Pharmaceuticals Portfolio (PJP – ETF report)

Within the broader healthcare space, I like pharmaceutical ETFs in particular. They are well positioned to benefit from aging global population and rising healthcare expenditure in emerging markets. Further, they are generally less volatile than others in this space.

Pharmaceutical firms should also benefit from improving pipelines and cost-cutting measures taken in recent years. (Read: Who Wins the World Cup of ETFs?)

PJP’s holdings are selected on the basis of a variety of investment merit criteria, including price momentum, earnings momentum, quality, management action, and value.
Well known pharma companies like J&J, Merck and Pfizer are among its top holdings. These companies derive a significant proportion of their revenue from international markets and stand to profit from aging population and rising incomes in these markets. In emerging markets, spending on healthcare is rising from rather low levels compared to the developed world and has a significant upside potential, benefiting these companies.
With its expense ratio of 63 basis points (due to enhanced indexing methodology), this ETF is slightly expensive but it has justified its higher cost with significant outperformance compared to its peers.
Asset Managers: SPDR S&P Capital Markets ETF ((KCE – ETF report))

The population is not only growing older but also wealthier. In general, older people have more wealth at their disposal and they continue to invest into old age. Per FT, current assets under management globally are about $ 87 trillion—one year of global GDP. Based on current trends, this number could reach $ 400 trillion by 2050. (Read: 3 Cyclical ETFs to buy in a rebounding US economy)

Rising investable wealth would work great for asset managers. In fact, many asset managers have already seen an increase in retail business versus institutional business. Many of them have introduced new, innovative products targeted at older, wealthier individuals.

KCE tracks the S&P Capital Markets Select Industry Index, holding 43 stocks in its basket. Asset management & custody banks take the top position in the basket at 60% while investment banking & brokerage takes the remaining share in term of the sector profile.
With respect to holdings, none of the securities make up more than 3% share, lowering company specific risks. It charges an expense ratio of 35 basis points and has a nice dividend yield of 2.3% currently. (Read: 3 Excellent Value ETFs poised to outperform)
Safe, Dividend Paying Stocks: Vanguard Dividend Appreciation ETF (VIG)

About two thirds of investable assets in the western world are owned by those over 50. It is a well-known fact that risk-return preferences change as we age. Older people tend to prefer safer assets, including high quality, dividend paying stocks.

Dividends have accounted for more than 40% of the total returns from the market over a long time horizon and thus they should be a part of any long-term investment portfolio. 
Further dividend payments are expected to continue to increase in the coming months as most large US companies have huge cash piles on their balance sheet and are in a position to increase payouts to shareholders.
ETFs that hold stocks with a high dividend growth potential have much better outlook compared with ETFs that focus on high dividend yielding stocks. Most high-yield ETFs focus on sectors that are likely to underperform in the rising rates environment.
VIG holds large high quality companies that have a record of increasing dividends for at least 10 years.
Current top holdings include well known names like J&J, Coco-Cola, Exxon, Pepsi and Wal-Mart. With its current strong focus on cyclical sectors like industrials and consumer goods/services, this ETF is poised to do well if the economy in general and labor markets in particular continue to improve. It has miniscule exposure to rate sensitive sectors like Utilities and Telecom—which will underperform when the rates start inching up.
With an expense ratio of 0.10%, this is one of the cheapest funds in this space. The SEC yield at 2.1% is not remarkable, but this fund is better suited for investors who seek long-term capital appreciation along with income and not just high current yield. (Read: How Pure Strategies Crushed the market)
The ETF made its debut way back in 2006 and now manages almost $ 24 billion in assets.
The Bottom Line

ETFs provide a convenient way to capitalize on the world’s rapidly aging demographic trend. The older population will spend more on healthcare, drugs and medical devices, so healthcare ETFs appear to be obvious plays.

Looking at the longer-term trend, safer investments will also benefit from aging population trends. Older people generally have more money at their disposal than the younger population and they prefer less risky investments including bonds and high quality dividend paying stocks. Further rise in investable assets would also result in a boom for asset managers.

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