Recently a new ETF has become available. This is the Wisdomtree international health care fund, ticker symbol DBR. The fund invests in an health care index containing only companies outside the US. The weights of the stocks in the index are determined by the dividends paid. Dividends are difficult to manipulate by the management of companies in the index, more difficult than for instance the earnings of a company.  Furthermore dividends are easy to measure and indices based on fundamental valuation factors are less vulnerable to index arbitrage.

The one thing I don't understand is that this ETF excludes companies from the US. US companies have a large part of the health care market, and pay dividends too. Nevertheless the back tested Wisdomtree Health Care Dividend index has outperformed the S&P Global 1200 Health Care index according to the Wisdomtree website. The costs of trading and fund management are not included in their diagrams by the way.

Indeed the valuations of US health care stocks are lower than ever, despite the aging US population. The question is whether that will remain so. In fact valuations of US health care companies are not much higher than the average valuation of US stocks in terms of P/E. Since health care companies often have monopolies with their products and health care spending will continue to increase, I expect that profits will increase in the coming years. In addition I would expect that the P/E of US health care companies will increase.

Ok, health care companies need to register new products with the authorities. Right now more patents expire than patents are registered. Nobody knows how long this trend will continue and this is the risk with investing in health care. By buying into a health care dividend fund you probably buy the companies that do not develop new products. Instead you buy the companies that make products based on expired patents. In the past 10 years this was a good strategy but I don't think this strategy will last forever.