The healthcare industry can be a promising place to invest. New drugs and treatments are developed all the time, and sometimes these findings generate massive returns for the companies that create them. The challenge is that many things can affect the share prices of stocks in the healthcare industry.
Companies spend millions of dollars developing new products and treatments. That investment pays off if they hit on something that works AND can get approved by the FDA and other regulators, but they incur massive debt if they miss the mark. As an investor, you have to (or should) do a ton of research before you ante up.
However, there is an alternative to investing in specific stocks. You could choose to invest in a healthcare-focused exchange-traded fund (ETF) instead. This strategy allows you to invest in a group of stocks that mimic the movements of the healthcare industry or subsets thereof. Let’s look at some of the top healthcare ETFs in greater detail.
Health Care Select Sector SPDR Fund [XLV]
The Health Care Select Sector SPDR Fund or XLV is an ETF that is designed to move in tandem with the Health Care Select Sector Index.
It includes pharmaceutical stocks as well as health care providers, health care equipment, and biotechnology.
The Health Care Select Sector SPDR Fund has been around since the end of 1998 and has a gross expense ratio of 0.13%.
Since its inception, XLV has returned 8.29% and boasts a 10-year return of 15.34%.
Fidelity MSCI Health Care Index ETF [FHLC]
The Fidelity MSCI Health Care Index ETF(FHLC) is designed to generate a similar stock return as the MSCI USA IMI Health Care Index, as calculated before any fees are assessed.
FHLC uses representative samples from different subsets of the MSCI USA IMI Health Care Index.
It was founded in October 2013 and carries a net expense ratio of 0.08%. Since its inception, the Fidelity MSCI Health Care Index ETF has returned 12.66% compared to 12.51% for the index upon which it is based.
Invesco S&P 500 Equal Weight Health Care ETF [RYH]
Invesco S&P 500® Equal Weight Health Care ETF(RYH) is another option. It has an 0.40% expense ratio and has been around since November 2006.
Since its inception, Invesco S&P 500 Equal Weight Health Care ETF has brought in a 13.08% return compared to the S&P 500 Index’s 8.51%.
Vanguard Health Care ETF [VHT]
VHT has been around since January 2004. Over the past 10 years, the Vanguard Health Care ETF has returned 15.98% compared to the 16.09% of its benchmark.
iShares U.S. Medical Devices ETF [IHI]
It contains 57 of these companies and its current expense ratio is 0.43%. Since IHI’s inception in May 2006, this ETF has posted a total return on 13.19% and 19.03% over the past ten years alone.
Top holdings in the iShares U.S. Medical Devices ETF include Abbott Laboratories, Medtronic, Thermo Fisher Scientific, Danaher Corp, and Becton Dickinson. Together, these five companies comprise over 49% of the ETF’s weighting.
iShares U.S. Healthcare Providers ETF [IHF]
The iShares U.S. Healthcare Providers ETF (IHF) is also very specific. Like IHI, this ETF focuses on a particular type of healthcare company – healthcare services.
It includes health insurance stocks as well as diagnostics companies and treatment firms.
IHF was started in May 2006 and it includes 47 holdings. Chief amongst these are UnitedHealth, Anthem, CVS Health, HCA Healthcare, and Humana. Together, they make up roughly 54% of the ETF’s portfolio.
The expense ratio for the iShares U.S. Healthcare Providers ETF is 0.43%.
iShares NASDAQ Biotechnology ETF [IBB]
If you are more interested in biotechnology and pharmaceuticals, the iShares NASDAQ Biotechnology ETF (IBB) may be a good choice.
It limits its investments to biotech and pharma companies that are listed on NASDAQ exclusively in an attempt to mirror the performance of those equities.
IBB’s inception date is Feb 2001 and its expense ratio is 0.47%.
Bottom Line: The Best Healthcare ETF to Buy
Investing in stocks or ETFs still comes with a risk – but the risk with ETFs is less than if you were investing in singular stocks.
The best healthcare ETF to include in your portfolio is the one that matches your opinion about the healthcare industry and its intended role in your portfolio.
Investing in the industry as a whole allows you to benefit from overarching movements within the healthcare industry.
If you are more confident in a particular subset, such as pharmaceutical companies, healthcare providers, or medical devices, you have the option to select ETFs that target these areas specifically.