There are several ways to invest in health care. Though the S&P 500 continues to set new highs like clockwork, many investors worry about their portfolios. Markets will be tested by the trade war with…
There are several ways to invest in health care.
Though the S&P 500 continues to set new highs like clockwork, many investors worry about their portfolios. Markets will be tested by the trade war with China, insurance stocks will be hurt by Hurricane Florence, and there’s constant trepidation about the endurance of this 10-year bull market. Investors looking for a way to reduce their risk can consider health care investments as a hedge against volatility. After all, while the economy goes up and down, there are always folks who need a checkup, buy their medication and seek out help when emergencies happen. Here are nine diversified exchange-traded funds that offer ways to invest in this stable sector.
A simple fund that holds more than 370 of the largest U.S. health care names, VHT is a great way to begin exploring the sector. Top holdings include big pharma names like Pfizer (PFE), consumer health giant Johnson & Johnson (JNJ) and insurer UnitedHealth Group (UNH). The fund is weighted by market capitalization, which means a small group of companies holds big influence over the fund. Admittedly, there isn’t a ton of volatility in these mega-cap health care plays. But 40 percent of this ETF is in its top 10 holdings, even though the total list of investments is quite long.
Investors interested in the big names in health care but in a slightly more diversified way might like this equal weight fund, which avoids bias toward a group of stocks by regular rebalancing. Though the total list of holdings is smaller, at just over 60 individual stocks at present, RYH aims for a target allocation of about 1.5 percent per company versus other health care funds that can be 10 times that amount in a single pick. The biggest names still remain, too, so you won’t miss out on the giants of health care as you embrace a more diversified approach.
If your idea of diversification is to play health care a bit more broadly than just the U.S., then this iShares fund offers a simple way to do that with a global strategy that covers the largest health care companies. Many U.S. mainstays also appear here, as well as Swiss pharmaceutical player Novartis (NVS) and the U.K.’s AstraZeneca (AZN). Taking the biggest names in the sector regardless of geography is a great way to ensure you have the leaders. And with a focus on large companies in developed markets, there’s no reason to fear a risky play in China or South America could result in unwelcome surprises.
Another twist is to stay domestic, but simply go smaller. The PSCH contains about 70 health care companies, including biotech company Ligand Pharmaceuticals (LGND), testing firm Neogen Corp. (NEOG) and account management and billing service provider HealthEquity (HQY). The largest stock in this fund is “only” about $5 billion in market value. While smaller companies can be volatile, the movement has been decidedly positive. This ETF is up more than 40 percent in 2018 and is one of the best-performing ETFs this year.
An interesting tactical play in health care is this Global X ETF that focuses on demographic shifts in the population. The fund invests in companies that serve the world’s growing number of seniors. This includes investments in firms like biotech Regeneron Pharmaceuticals (REGN), which has treatments for cancer and high cholesterol — particular conditions that pose a problem for millions of older folks. Many of the companies in this fund help people live longer and more productive lives. That’s a win-win both for the customers and the investors that hold these stocks.
Another twist on health care investing is to focus on smaller, niche companies targeting the next generation of medical breakthroughs. These smaller stocks are more risky, since they can either become instant successes or their stock plummets as potential cures fail to reach expectations. A diversified fund like XBI lessens the risk with almost 120 holdings. Top positions currently include Sarepta Therapeutics (SRPT), a company that makes genetic medicines to treat rare neuromuscular diseases, and Intercept Pharmaceuticals (ICPT), which helps treat liver diseases and metabolic disorders.
The flip side of chasing development-stage biotech companies is to go after the big guys. A consistent reason the smaller companies surge is a buyout from a big pharma player with deep pockets. So why not go right to the source? That’s what PPH provides, with some of the biggest names in pharmaceuticals around the world, including Bristol-Myers Squibb Co. (BMY), Pfizer and Merck & Co. (MRK). And, PPH is one of the more stable ways to invest in health care since most of these firms have a reliable income stream thanks to a suite of blockbuster maintenance drugs for common diseases.
While drug companies are well known, another reliable health care segment involves medical device stocks. The margins can be just as good on devices like replacement valves for hearts, and steady sales can be just as reliable for medical products such as surgical tools or even routine items like latex exam gloves. This ETF targets that segment, with holdings that include testing and lab materials giant Abbott Laboratories (ABT) and Medtronic (MDT), which specializes in cardiovascular technologies, such as stents. The IHI fund is attractive thanks to a strong baseline of sales and the potential for big profits from specialty devices.
As the name implies, this ETF seeks the fastest moving companies in health care. Instead of chasing a specific geography or sub-industry, the holdings are centered around picks that pass its screening for metrics such as relative strength compared with peer companies and share price momentum. The result is a list of about 50 holdings, unsurprisingly populated by some smaller and relatively unknown plays that have just begun to break out. These include diagnostics company Exact Sciences Corp. (EXAS), which is up more than 40 percent in 2018, and remote doctor consultation platform Teladoc Health (TDOC), which is up an impressive 110 percent year-to-date.