We depend upon it, we all need it, and it’s one of the most robust industries in the world—it’s the healthcare industry, and investors around the country recognize the value of investing in health-centric exchange-traded funds.
The healthcare sector encompasses much more than just hospital visits—the industry also includes pharmaceutical developments, insurance, and medical device development.
Though the healthcare sector is massive, a number of ETFs have popped up in recent years that allow investors to place their money into a specific niche of the market. We’ve rounded up some of the best healthcare ETFs currently available for purchase so you can make the most informed ETF decision possible.
Benefits and Risks in the Healthcare Sector
Though there is demand for medical services and products, the industry has both positive and negative societal trends.
Positive trends currently influencing the healthcare industry
Longer life spans
The average life expectancy in the United States today is about 78.69 years—a number up from an average of 69.95 years in 1968, just 50 years ago. As men and women live longer, they require more medical care and services to sustain their quality of life.
Additionally, medical technology advancements and breakthroughs in drug research have helped those with chronic and genetic diseases live longer than ever before.
An aging population
As we get older, we require more medical services and attention to maintain a high quality of life. The Baby Boomer generation (those born between the years of 1946 and 1964) is currently heading into retirement—meaning that they will soon spend more on medical services.
The obesity epidemic
Americans are getting bigger by the day. According to data from the Center for Disease Control, about 160 million Americans are either overweight or obese—a number equal to about 66% of the population. High rates of obesity demand an increase in a host of medical care services and products, ranging from cholesterol-lowering drugs to mobility scooters.
Obesity has also been linked to a variety of diseases including heart disease, depression, and type 2 diabetes—all of which require medical treatment and regular visits to healthcare providers.
Risks of investing in the healthcare sector
A movement towards a single-payer healthcare system
Single-payer healthcare is a type of healthcare system in which medical services and procedures are funded through a single source, typically taxes. The United States currently relies on a mostly multi-payer system in which individuals or their employers cover health insurance.
In recent years, a growing political movement has advocated the shift from a multi-payer to a single-payer healthcare system. The implementation of a completely single-payer system would drastically lower profits seen in the healthcare industry, thus lowering the value of nearly every type of healthcare ETF on the market.
Healthcare is expensive—and in order to make it more affordable, many hospitals have implemented cost controls to curb expenses due to pressure from insurance companies. This includes a limitation of nonvital procedures, a movement towards the expanded use of generic drug alternatives in lieu of name brands, and careful monitoring of administrative expenses.
Uninsured and underinsured persons
By law, if an injured person walks into an emergency room for treatment, the hospital must provide it to them—regardless of whether or not they have insurance.
According to data from the Henry J. Kaiser Family Foundation, the cost of “uncompensated medical care” exceeded $83 billion in the year 2013 alone. Though this risk can has been slightly offset through the expansion of the Affordable Care Act and the spread of low-cost community centers and clinics, uninsured men and women still provide a massive source of loss for the healthcare industry as a whole.
The Best Healthcare ETFs
1. Vanguard Healthcare Index Fund
A massively diverse initiation to the healthcare industry, the Vanguard Healthcare Index Fund holds over $9.83 billion in assets. This fund is an index fund, meaning that it attempts to mirror the performance of the healthcare industry as a whole by tracking the MSCI U.S. Investable Market Healthcare 25/50 Index.
Launched in February of 2004 by index and ETF powerhouse Vanguard, one of the world’s top providers of low-cost funds in a variety of industries and niches. True to the values of its founding company, the Vanguard Healthcare Index Fund comes along with a low expense ratio of just 0.10% and a minimum investment of $3,000.
If you want to take advantage of the benefits of the lower-expense Admiral class shares, you’ll need to make an investment of at least $100,000. The fund’s major holdings are in Johnson & Johnson, Pfizer, and Merck, and the fund has returned an average of 14.76% in the past decade. Vanguard offers an ETF version of this fund (VHT), which offers an excellent introduction to the world of health-related ETFs for new buyers.
2. Healthcare Select Sector SPDR ETF
By far the largest ETF in the field of healthcare, the Healthcare Select Sector SPDR ETF holds a whopping $18.31 billion in assets.
The majority of the fund’s holdings are kept in the pharmaceutical industry, with large investments in Johnson & Johnson and UnitedHealth Group Incorporated. Unlike Vanguard’s Healthcare Fund, the Healthcare Select Sector SPDR’s holdings are not diversified, with the top ten corporations making up over 49% of the fund’s total holdings.
However, with a comparative expense ratio of 0.14% and an average 5-year return of 15.24%, the Healthcare Select Sector SPDR is a solid offering in the realm of health and wellness.
3. ARK Genomic Revolution Multi-Sector ETF
The ARK Genomic Revolution Multi-Sector ETF offers investors a concentrated opportunity to invest in the biotechnology sector. The fund’s largest holdings are in Intellia Therapeutics, Inc. which holds about 11% of all assets. The ETF has an expense ratio of 0.75%, which makes it a costlier option than most other healthcare ETFs on the market.
Though the fund is a slightly riskier investment when compared with Vanguard’s offerings and competitors, it also has a higher potential for reward. Last year, the fund returned about 21.27%. The ARK Genomic Revolution Multi-Sector ETF is recommended for younger investors and those who can stomach a higher level of risk.
4. Principal Healthcare Innovators ETF
The Principal Healthcare Innovators ETF is a unique healthcare fund that focuses largely on technology and medical tech research instead of healthcare itself. The fund holds the majority of its assets in small- and medium-cap healthcare companies; a stark contrast to both Vanguard’s Healthcare ETF and the Healthcare Select Sector SPDR, which both hold a large number of assets in blue-chip stocks like that offered by Johnson & Johnson.
It tracks the NASDAQ U.S. Healthcare Innovators Index, holds a little over $53 million in assets and is on the rise for 2019.
5. iShares U.S. Medical Devices ETF
As its name suggests, the iShares U.S. Medical Devices ETF invests largely in companies that produce devices such as pacemakers, magnetic resonance imaging (MRI) scanners, prosthetic limbs, X-rays, and other day-to-day medical tools.
The fund’s largest holdings are in Medtronic PLC, Abbott Laboratories and Thermo Fisher Scientific, Inc., which all make up about 27% of the fund’s total assets. The fund attempts to track the Dow Jones U.S. Select Medical Equipment Index and carries an expense ratio of 0.43%. Its total net assets recently reached $2.76 billion, and the fund offers an excellent niche investment for healthcare industry buyers who are looking to avoid investing in the market as a whole.
6. iShares Global Healthcare ETF
The iShares Global Healthcare ETF is the total market counterpart of the iShares Medical Devices ETF and tracks the S&P Global 1200 Healthcare Index.
The ETF invests 90% of its securities in the world’s largest healthcare companies with major holdings in Johnson & Johnson, UnitedHealth Group Incorporated and Novan, Inc. The iShares Global healthcare ETF is unique because unlike other health-related funds on this list, the iShares version seeks out large investments from international corporations.
Though about 75% of assets are still held in U.S.-based corporations, significant assets are also held in equities based out of Japan, Oceania, and Western Europe. With an expense ratio of 0.48%, the fund is a bit more expensive than most, but investors with an international perspective may find this extra cost worth it.
Where you can buy healthcare ETFs
Thinking about purchasing a healthcare ETF? Take a look at Benzinga’s favorite brokers. Many offer commission-free ETFs and bonuses for new customers.
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Though there are many benefits to investing in the healthcare sector, the future of the Affordable Care Act and a growing population interested in installing a single-payer healthcare system will continue to make the market volatile.
The healthcare sector is currently considered one of the riskier areas of investment, so younger investors and those who can tolerate a large percentage of risk in their portfolio are most likely to benefit from the purchase of a healthcare ETF.
Looking to learn more about ETFs and whether or not they’re right for your financial portfolio? Check out our picks for the best online brokers for ETFs.