U.S. Equity ETF Portfolio Strategy Explained

David R. Kotok
Wed Sep 29, 2021

Several clients asked about our overweight healthcare position and they wondered if it isn’t time to take profits. They noted that the Delta variant infection rate was peaking and that some folks believe we have reached “herd immunity.”
 

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David-Kotok-U.S. Equity ETF Portfolio Strategy Explained (Sept 2021)


Here’s our answer and rationale to this very fair question. We are continuing an overweight position in healthcare (about 28–29% versus the market weight of about 14%) in our US Equity ETF Portfolio. We believe the pandemic is far from over in terms of direct sickness effects.
 
Please remember that the pandemic is worldwide and that we have less than two years’ actual experience so far into what we expect to be three to five years before COVID becomes endemic. It will then be treatable (with new technologies) at lower cost and therefore less deadly.
 
If we extend estimates of present experience and forecasts (like IMHE’s or similar models), we can project that the US will eventually have over 2 million “excess deaths” and a decline in life expectancy of about three years. This is a huge demographic shock which didn’t exist in economic models two years ago. We are presently confronting what was previously the worst-case scenario that was dismissed as too extreme in 2019; yet, here it is.
 
Among technical economics projections, the US’s COVID “years of life lost” estimate may reach 30–40 million. Reason: While medical care is lowering per capita death rates, anti-vax behaviors and schools openings without full mitigation mean that younger people are dying. Excess deaths among young people constitute a huge addition to the “years of life lost” metric and therefore a massive economic shock.
 
We do NOT believe COVID mutation risk ends with the current Delta surge. The history of viruses confirms the reality of continuous mutation. The danger that some problematic new variant will emerge remains, whether certain politicians and media agree or not. COVID doesn’t watch TV or vote; it just evolves to find new ways to infect us so we can then spread its newest version to others. It can also mutate and disappear. We don’t know what nature has in store for us tomorrow.
 
In addition, a huge cohort of long-COVID patients is developing, and the evidence of long-COVID symptoms (neurological, cardiac, respiratory) continues to unfold. Our preliminary estimate is that long-COVID symptoms will evidence themselves in between 5 million and 30 million Americans and eventually show up in 100s of millions of people worldwide. Those folks are destined to be temporarily or partially or r permanently disabled for periods of months or years. Long Covid economic damage is in addition to the YLL from death. And it is additive to the baseline of disability estimates that existed pre-Covid.
 
Vaccines clearly reduce long-COVID risk; that evidence strengthens daily and is very well curated. Thus the unvaccinated community (including children and young adults) has become the more likely source of additional long-COVID cases. So far, there is no good evidence that ivermectin or hydroxychloroquine or any of the other erstwhile treatments can successfully treat chronic long COVID. Tapeworms, malaria, or lupus may be successfully treated but long COVID? Not too likely.
 
We view long COVID as a major unfolding development with enormous demands on the biomedicine and healthcare enterprise establishment. We expect this sector to show growth for the entire decade. American companies and their strategic partners are the world’s most important entities to confront long COVID as well as to enable vaccination.
 
Here’s a Barron’s Roundtable about investing in the healthcare sector. Disclosure: Cumberland portfolios hold several different securities mentioned in the article.
 
“Medicine’s Golden Age Is Dawning. 10 Ways to Invest,”
https://www.barrons.com/articles/medicine-healthcare-stocks-roundtable-51632527474

Here’s a link to a report about a South Carolina hospital system CEO and why he has now implemented a policy of mandatory full vaccination.
 
“Why a South Carolina hospital CEO changed his mind about vaccinations,”
https://www.beckershospitalreview.com/hospital-management-administration/why-a-south-carolina-hospital-ceo-changed-his-mind-about-vaccinations.html
 

David R. Kotok
Chairman of the Board & Chief Investment Officer
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