Health care exchange-traded funds are good for diversifying your portfolio.
The S&P 500 Health Care Sector Index typically generates strong performance from May to October, and the sector represents 13% of the U.S. equity market, says Todd Rosenbluth, head of ETF and mutual fund research at New York-based CFRA Research. Investors should allocate at least 13% of their portfolio to health care ETFs or stocks, he says. “Historically, health care stocks have held up during volatile times for the stock market, and we just recently hit the seasonal weak six months.” Rotating into the health care sector right now makes sense, says Shawn Cruz, senior manager of trader strategy at TD Ameritrade. The sector has the “potential for additional upside in the space and has not run quite as far as industrial and tech,” he says. “It has the potential to benefit from elective surgeries and other treatments as well.” Here are six ETFs to consider adding to your portfolio.
Health Care Select Sector SPDR ETF (ticker: XLV)
The Health Care Select Sector SPDR ETF has “favorable” technical trends, and the ETF’s performance has “high reward potential, modest risks and low costs relative to sector equity ETF peers,” Rosenbluth says. The ETF holds several appealing stocks based on CFRA’s fundamental analysis, including Abbott Laboratories (ABT), Johnson & Johnson (JNJ), Medtronic (MDT), Pfizer (PFE) and UnitedHealth Group (UNH), he says. The stocks also generate strong dividend returns. The expense ratio is 0.12%, and the one-year and five-year returns are 21.69% and 13.57%, respectively.
Invesco S&P 500 Equal Weight Health Care ETF (RYH)
The Invesco S&P 500 Equal Weight Health Care ETF has nearly equal exposure to both mega caps and attractively valued and more moderately sized stocks such as Cardinal Health (CAH) and Laboratory Corp. of America Holdings (LH). RYH charges a higher expense ratio of 0.4% compared to XLV’s 0.12%. The one-year return is 26.3%, while the five-year return is 14.1%. The health care sector is a defensive group and tends to outperform when the broader market is weaker, says Thomas Hayes, chairman of Great Hill Capital in New York. Rebalancing is crucial to a portfolio, and investors must demonstrate discipline to sell sectors that have risen and purchase those that are out of favor, he says.
iShares Global Healthcare ETF (IXJ)
The iShares Global Healthcare ETF focuses on stocks from pharmaceutical, biotechnology and medical device companies and is benchmarked to the S&P Global 1200 Health Care Sector Index. The expense ratio is 0.46%, the one-year return is 28.03% and the five-year return is 11.6%. These ETFs are a low-cost way to gain exposure to the sector, says Mike Loewengart, managing director of investment strategy at E-Trade. The companies in the ETFs have demonstrated that they are “consistently durable during volatile periods” because there is a need for the services during both weak and strong economic periods, he says.
Vanguard Health Care Index Fund ETF (VHT)
The Vanguard Health Care ETF tracks the performance of the MSCI US Investable Market Health Care 25/50 Index, which is a benchmark index of large, medium and small U.S. companies in the health care sector. There are 445 stocks in the index currently. The expense ratio is 0.1%, while the one- and five-year returns are 23.55% and 14.7%, respectively. The health care sector’s consistent returns are generally uncorrelated with the broader stock market and can be a good option for diversification in a portfolio, says Stuart Michelson, a finance professor at Stetson University. Health care is now the second-largest sector in the S&P 500, and it also represents more than 10% of the Nasdaq. Five of the 30 stocks in the Dow Jones Industrial Average are health care related, he says.
iShares Nasdaq Biotechnology ETF (IBB)
The iShares Nasdaq Biotechnology ETF focuses on biotechnology and pharmaceutical companies and is the largest of the biotech stock ETFs with a nearly $11 billion fund that regularly trades more than 4 million shares daily. The ETF is benchmarked to the Nasdaq Biotechnology Index and contains at least 277 stocks. The expense ratio is 0.46%, and the one- and five-year returns are 25.05% and 11.86%, respectively. Health care has performed well during previous down markets and could act as a ballast in a portfolio, Loewengart says. Valuations for health care companies remain reasonable but do face some government regulation.
SPDR S&P Health Care Equipment ETF (XHE)
The SPDR S&P Health Care Equipment ETF is a niche ETF that focuses on companies that manufacture and sell health care equipment and health care supplies. The ETF is less liquid since it owns only 85 stocks. The expense ratio remains low at 0.35% with one- and five-year returns of 37.44% and 22.4%, respectively. The majority of investors should allocate only 5% to 10% of their money to health care to avoid unreasonable risk, Michelson says.
Six best health care ETFs to buy:
— Health Care Select Sector SPDR ETF (XLV)
— Invesco S&P 500 Equal Weight Health Care ETF (RYH)
— iShares Global Healthcare ETF (IXJ)
— Vanguard Health Care Index Fund ETF (VHT)
— iShares Nasdaq Biotechnology ETF (IBB)
— SPDR S&P Health Care Equipment ETF (XHE)
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Update 06/15/21: This story was published at an earlier date and has been updated with new information.