The healthcare sector is known for its good growth prospects and stability, even amid economic downturns. Depending on your investment objectives and style, you may want to add a few healthcare stocks to your portfolio. And what better way to do that than through healthcare ETFs?
I have compiled this guide to help you understand the basics of the healthcare sector and the viable investment opportunities it presents. I also explained how to expose your portfolio to this industry through exchange-traded funds (ETFs) while outlining the best funds to consider should you decide to add healthcare sector exposure to your portfolio.
There is a lot to discuss, but let’s start with the key takeaways.
Key Takeaways
In a hurry? Check the major takeaways from this comprehensive guide instead.
- The best healthcare ETFs to consider now include XLV, FHLC, VHT, RYH, IXJ, IHF, and IHI.
- Investing in healthcare stocks is a way to healthily expose your portfolio to the healthcare sector of the stock market.
- Healthcare stocks come in different types, including pharmaceutical, biotech, medical supply, medical care, health insurance, and pharmacy benefit manager stocks.
- Healthcare ETFs allow you to invest in a basket of healthcare stocks at a go. This enhances diversification and reduces risk.
- Unlike stocks, healthcare ETFs are also passively managed, cheaper, and easily accessible.
- Each of these ETFs has been analyzed based on its financial performance, dividends, and growth prospects.
- Your preferred healthcare ETF will depend on your investment method, goal, and other preferences.
Why Invest In The Healthcare Sector?
Almost everyone requires healthcare at some point in their lives. From routine checks and vaccinations to life-saving treatments and surgeries, the world order relies on the healthcare sector more than we think.
In terms of numbers, isn’t it fascinating to learn that Americans expended over $3.5 trillion on healthcare in 2018? Let’s throw in some context. The amount translates to 17.7% of the gross domestic product (GDP) of the United States and a 4.6% increase from 2017. It also means each person spent about $11,000 on healthcare in a single calendar year. These massive numbers are expected to rise even higher in the next few years.
From a potential investor’s point of view, healthcare is one of the few sectors with long-term opportunity potential. For instance, the increasing rate of seniors in the United States means more money will go into healthcare. The cash flow into the industry will result from the need for these older people to access medical care.
The pandemic is another pointer to the importance of healthcare, especially to national security. The turn of events in 2020 has forced the government to drive more resources into healthcare to protect society against health care problems that threaten us. Health care companies are also less likely to be subject to over-regulation by politicians. This gives them the much-needed stability to find lasting solutions to crucial health care problems we currently face.
The relevance of the healthcare sector is further preserved by its integration with technology. Healthcare is going beyond the conventional insurance, pharmacy, device, and insurance sub-sectors. We are witnessing a rise in the production and adoption of health care products and services running on artificial intelligence, robotics, monitoring, and 3D printing.
How Do Healthcare ETFs Work?
One of the easiest ways to break into healthcare as an investor is through healthcare ETFs. Healthcare exchange-traded funds (ETFs) are designed to invest most or all of their portfolio worth in a basket of stocks of companies in the healthcare industry. These include companies offering medical services and insurance or developing and manufacturing drugs and medical equipment.
Like most traditional ETFs, each healthcare ETF follows a unique investment strategy or method to generate dividends and returns for investors. They are passively managed and offer exposure to major sub-sectors like biotechnology, medical services, healthcare providers, and pharmaceuticals. Investors can choose a healthcare ETF based on their preferred subsector.
These funds offer investors more diversification, making it less risky and ideal for new and experienced investors. All you have to do is look into the group of health care stocks and the industry sector your potential fund covers. If they are the group of stocks you want to add to your portfolio, then you are good to go.
Let’s move to the list of healthcare ETFs you should choose from.
Top-Rated Healthcare ETFs to Choose From
If you are shopping for your first or additional healthcare ETFs, the list below has some excellent options you should consider.
1. Health Care Select Sector SPDR (XLV)
The first entry on the list is the Health Care Select Sector SPDR Fund (XLV) from State Street Global Advisors (SSGA) Funds Management Inc. It is designed to track the Health Care Select Sector Index, which comprises the healthcare stocks in the S&P 500 index. Therefore, it exposes investors’ portfolios to Wall Street’s most prominent healthcare companies.
The Health Care Select Sector SPDR Fund was launched in December 1998 with USD as its base currency. It has 64 holdings in its portfolio with a weighted average market cap of over $198 million. XLV covers five significant sectors of the healthcare industry: Pharmaceuticals (29.62%), Health Care Providers & Services (24.58%), Health Care Equipment & Supplies (18.38%), Biotechnology (14.19%), and Life Sciences Tools & Services (13.23%). The top holdings include UnitedHealth Group Inc, Johnson and Johnson, Pfizer Inc, Eli Lilly and Company, and AbbVie Inc.
The fund has returned 15.05% in the last ten years and 12.53% in the previous five, which shows it is an excellent performer. It distributes dividends quarterly, and its current dividend yield is 1.3%.
XLV’s expense ratio is 0.10%.
2. Fidelity MSCI Health Care Index ETF (FHLC)
This fund seeks to replicate the performance of the MSCI USA IMI Health Care Index, which uses a representative sampling indexing strategy to choose viable companies in the healthcare sector of the U.S. equity market. It was launched in October 2013 as a passively managed fund.
FHLC is a relatively large blend fund with 445 holdings, including UnitedHealth Group Inc, Johnson and Johnson, Pfizer Inc, Eli Lilly and Company, AbbVie Inc, Thermo Fisher Scientific Inc, and Merck and Co Inc, among others. The top 10 of these holdings account for 47.71% of the entire portfolio. It has the same industry exposure as XLV.
It is the cheapest healthcare ETF on the list, with an expense ratio of 0.08%. Regarding annual total returns, FHLC has returned 12.17% in the last five years and 13.98% in the previous three. Its distribution yield is 1.32%.
3. Vanguard HealthCare Index ETF (VHT)
Vanguard offers one of the most popular healthcare ETFs in Vanguard HealthCare ETF (VHT). It is also a passively managed domestic fund that seeks to replicate the performance of the MSCI US Investable Market Health Care 25/50 Index. According to MSCI, the index captures the large, mid, and small-cap segments of the U.S. equity universe, focusing on the healthcare sector.
The Vanguard Health Care ETF fund’s $19.6 billion net assets under management are invested in 407 stocks covering ten industry sectors. These include XLV’s five sectors: Managed Healthcare, Healthcare Facilities, Healthcare Technology, and Healthcare Distributors. Notable holdings in the fund’s portfolio are the same as the two previous ETFs we have compared.
VHT has repaid investors’ faith by turning 15.09% in the last ten years and 12.17% in the previous five. Its 14.05% return in the last three years is the best on this list. It is also relatively cheap, with an expense ratio of 0.10%.
4. Invesco S&P 500 Equal Weight Health Care ETF (RYH)
The Invesco S&P 500 Equal Weight Health Care ETF (RYH) fund invests at least 90% of its total assets in stocks of the S&P 500 Equal Weight Health Care Index. These include equally weighted stocks of the S&P 500 index’s healthcare sector. It was launched in November 2006.
RYH’s total net assets are $937 million, spread across 64 holdings. The fund is 100% domestic and covers only the US equity market. The sector allocation includes Health Care Equipment & Supplies (28.72%), Health Care Providers & Services (24.80%), Life Sciences Tools & Services (18.75), Pharmaceuticals (14.43), and Biotechnology (13.29).
The biggest names in RYH’s portfolio include Moderna, Vertex Pharmaceuticals, Eli Lilly, Incyte, AbbVie, Zoetis, and others. The fund has returned 12.00% since its launch and 14.35% in the last ten years. It returned 10.40% in the previous three years.
The expense ratio is 0.40% making it the most expensive entry on this list.
The iShares Global Healthcare ETF is the first of the three iShares funds on this list. The investment objective of this fund is to track the results of an index composed of global equities in the healthcare sector, i.e., the S&P Global 1200 Healthcare Sector Index.
IXJ has total net assets of $3.5 billion spread across 114 holdings, including UnitedHealth Group, Johnson and Johnson, Pfizer, Eli Lilly, Abbvie, Roche Holding Par, and others. The fund also invests in the industry’s Pharma, Biotech, and Life Sciences (64.10%) and Health Care Equipment and Services (35.51%) sectors. Regarding geographical breakdown, only 72.13% of the stocks in IXJ’s portfolio are domestic. Other major regions include Switzerland (8.14%), Japan (4.78%), the United Kingdom (4.18%), and Denmark (3.26%).
The average annual return of IXJ since inception is 7.60%. It has returned 12.33% in the last ten years and 9.89% in the previous five. The MSCI ESG rating is AA, with a corresponding score of 8.1. IXJ’s expense ratio is 0.40%.
IHF is iShares second entry on this list. It is an equity fund designed to track the Dow Jones U.S Select Healthcare Providers Index, which comprises U.S. equities in the healthcare providers sector.
There are 71 stocks in IHF’s portfolio and total net assets worth over $1.5 billion. Considering the fund focuses on healthcare providers, its major sectors include Managed healthcare (45.72%) and Healthcare Services (37.32%). Healthcare facilities (11.45%), Healthcare Technology (4.20%). The biggest names in its portfolio include UnitedHealth Group, CVS Health Corp, Elevance Health Inc, Centene Corp, Cigna Corp, Humana Inc, HCA Healthcare Inc, and others.
IHF has recorded 11.35% average annual returns since inception. The numbers are 15.57%, 12.84%, and 14.99% in the last ten, five, and three years, respectively. Therefore, it is one of the best performers on this list. MSCI also gave the fund an ESG rating of AAA and a corresponding score of 8.6%.
The expense ratio of IHF is 0.39%.
We round up this list with the iShares U.S. Medical Devices ETF (IHI). As the name indicates, it tracks the investment results of an index consisting of U.S. equities in the medical devices sector – the Dow Jones U.S. Select Medical Equipment Index. If you prefer exposure to only medical device stocks, this should be your go-to fund.
IHI was launched and has since added 64 stocks to its portfolio and total net assets worth $6.3 billion. The biggest names in IHI’s portfolio include Thermo Fisher, Abbott Laboratories, Medtronic, Boston, Becton Dickinson, Intuitive Surgical, and others. In terms of sector coverage, it focuses only on Healthcare Equipment (78.08%) and Life Sciences Tools/Services (21.34%). So, if you need a health care equipment ETF, this is your best bet.
The total return of IHI since inception is 12.26%. It has also returned 17.04% in the last ten years and 13.03% in the previous five. The MSCI ESG ratings of IHI are the lowest of the three iShares funds on this list. The stocks are rated BBB with a corresponding score of 5.4.
IHI’s expense ratio is 0.39%.
Final Words
The healthcare sector may not be getting the same hype as the tech or financial industry. But this takes nothing away from the fact that it is one of the rewarding sectors for investors. Away from investment, healthcare is one of the most crucial industries to human survival. Healthcare stocks also hold up in economic shake-ups while keeping volatility low.
How To Choose The Best Healthcare ETF for You?
No two healthcare ETFs are the same. Each fund tends to focus on one or more specific sectors of the industry. It would be best to look out for the sectors and geographical areas your potential healthcare ETFs cover before deciding. It is also advisable to consider metrics like investment track sector and expense ratio.
Finally, you do not need too much information or knowledge to invest in healthcare ETFs. This guide already provided almost all you need. You only need to choose which funds work best for you, whether health care equipment ETF, health care industry ETF, health care providers ETF, or biotech companies ETF. Then you can buy them from the issuer or your broker.
There are more educational investment guides and portfolio reviews on our website. Feel free to check them out.
Good luck.