It’s a no-brainer that global demand for healthcare products and services will rise as the population ages and as billions of people in developing nations join the middle-class in the next few decades.

Global healthcare spending will grow at 4.1% annually between 2017 and 2021, notes Deloitte in its 2018 Global Healthcare Outlook report. Put another way, healthcare will grow faster than the global economy, as the world population expands and medical treatments increase.

Just over one in 10 people worldwide will be aged 65 or over by 2021, says Deloitte. The ageing population megatrend, well known in markets for years, has a long way to run. Ensuring portfolios are exposed to companies that benefit from rising life expectancy is smart.

The obesity megatrend, too, is just warming up. As middle-class consumption in Asia booms, diets are changing, as people there eat Western-style food more often. Chip, cookie and chocolate sales in many emerging nations are growing annually at double-digit rates, as a snacking culture develops. Owning fast-moving consumer goods companies leveraged to this trend appeals.

Sadly, a greater incidence of obesity means the number of diabetes sufferers worldwide will rise from 415 million to 642 million by 2040. Urbanisation and sedentary lifestyles will cause higher rates of chronic disease. Dementia is expected to become a trillion-dollar disease this year.

Yes, investors can be caught out by eye-catching health statistics. I’ve interviewed lots of biotech companies over the years that talk about billion-dollar global diseases and their leverage to them. But many speculative biotechs end up burning shareholders.

I favour ETFs for megatrend or thematic investing. Active funds have an important portfolio role but index funds, such as ETFs, provide more targeted exposure to global megatrends at lower cost – and, on average, outperform their active peers after fees.

It is not a case of index or active funds, but rather how best to combine them to optimise a portfolio’s risk-adjusted return.

Here are four healthcare ETFs to consider: two are quoted on the ASX, the others on the New York Stock Exchange and NASDAQ.

1. BetaShares Global Healthcare ETF (ASX Code: DRUG)

Launched in 2016, DRUG provides exposure to 60 global healthcare companies through a single trade via the ASX. Top holdings include Johnson & Johnson, UnitedHealth Group, Pfizer, Novartis and Roche Holding. About 70% of the portfolio is in US stocks.

Investors cannot get this type of exposure buying stocks directly on the ASX. We have nothing comparable to a Johnson & Johnson or Pfizer. Also, Australia’s best healthcare stocks, possibly because of a lack of choice, tend to trade on higher multiples than comparable offshore peers.

DRUG has an average trailing price-earnings (PE) multiple of 16.7 times. Cochlear trades on almost 40 times, CSL is on 33 times and Ramsay Healthcare is on 20. Australia has a handful of fantastic listed healthcare companies but better value in the sector is available overseas.

DRUG’s other attraction is currency hedging. Most thematic ETFs on the ASX are unhedged for currency, meaning investors need a view on the underlying security and the Australian dollar, which is notoriously hard to forecast and can crush returns if it moves the wrong way.

DRUG returned 15% over one year to September 2018.

Chart 1: BetaShares Global Healthcare ETF

 Source: ASX

2. iShares Global Healthcare ETF (ASX Code: IXJ)

IXJ, one the world’s great healthcare ETFs, was the first of its kind on the ASX. The ETF, a CHESS Depositary Interest (CDI) on the ASX, tracks the S&P Global 1200 Healthcare Sector index. I identified IXJ for the Switzer Super Report in early 2016.

IXJ holds far more stocks than DRUG and is thus less concentrated. The iShares ETF had an average trailing PE of 25.3 at September 2018, principally because it owns many small-cap and mid-cap healthcare stocks that tend to trade on higher valuation multiples.

Unlike DRUG, IXJ is not hedged for currency movements. IXJ charges 48 basis points annually and DRUG costs 57 basis points. IXJ is cheaper and more diversified, but DRUG eliminates currency risk (and extra returns if currency moves in the right direction).

IXJ returned 23% over one year to September 2018 and has a five-year annualised return of 17% to September 2018. It has been around a lot longer than DRUG and has an excellent record.

Chart 2: iShares Global Healthcare ETF

Source: ASX

3. SPDR S&P Biotech ETF (NYSE: XBI)

Quoted on the New York Stock Exchange, XBI invests in an index of 114 biotech companies. Unlike most thematic ETFs that use market-weighted indices, XBI has an equal-weighted approach. Its stock holding is not adjusted according to market capitalisation.

The equal-weighted methodology means XBI has a performance bias towards US small-cap biotech companies (at least by US standards). XBI is an interesting idea for Australian investors who want global exposure to earlier-stage biotech companies through a diversified approach.

A fund approach makes sense: biotech losers far outnumber winners, such is the speculative nature of drug development. The key is to have exposure to a handful of winners that can produce large gains that offset losing investments in the sector.

XBI has returned almost 18% annualised (in US-dollar terms) over five years to September 2018.

Chart 3: SPDR S&P Biotech ETF

Source: Google Finance

4. The Obesity ETF (NASDAQ: SLIM)

I am always wary of niche ETFs. Too many issuers launch such ETFs to cash in on hype and they don’t always last or have a good record. The Obesity ETF, a play on global companies leveraged to this health epidemic, could be an exception.

Issued by Janus Henderson Investors, a prominent global asset manager, SLIM provides exposure through 47 constituents, most of them giant healthcare or pharmaceutical companies.

Almost half the US population will be obese by 2030, notes Janus Henderson, and an estimated US$2 trillion will be spent annually to tackle the problem.

SLIM returned 37% (in US-dollar term) over one year to September 2018. It’s tiny in the scheme of ETF markets, costs 50 basis points annually and suits experienced investors.

As with the SPDR S&P Biotech ETF, currency is a consideration for Australian investors.

Chart 4: The Obesity ETF

Source: Google Finance

• Tony Featherstone is a former managing editor of BRW, Shares and Personal Investor All prices and analysis at October 24, 2018.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regard to your circumstances.