As markets fall, now may be a good time to add some defense to your portfolio.
The Global Industry Classification Standard separates the stock market into 11 sectors. One of the more resilient and defensive ones is the health care sector, which holds companies involved in the development, production and sale of biotechnology, pharmaceuticals, equipment and services. It is the second-largest sector by weight in the S&P 500 after information technology, at 14.1%. Health care stocks have several traits that make them desirable investments. These include evergreen demand that protects their margins and competitive advantages, lower sensitivity relative to the market, lesser volatility when it comes to large-cap blue-chip players and higher-than-average dividend yields. While investors can pick and choose individual health care sector stocks, a more diversified option might be via an exchange-traded fund, or ETF, that holds a basket of health care stocks. Here are six of the best health care sector ETFs to buy in 2022.
Health Care Select Sector SPDR ETF (ticker: XLV)
State Street offers an array of 11 “Select Sector” ETFs, each corresponding to a sector represented in the S&P 500. XLV tracks the Health Care Select Sector Index, which only holds health care stocks found in the S&P 500. Currently, this comprises 64 holdings, which are all large-cap U.S. equities like Johnson & Johnson (JNJ), Pfizer Inc. (PFE) and UnitedHealth Group Inc. (UNH). Holdings in the ETF have a median market capitalization of $33 billion, which makes the fund very large-cap oriented. Over the trailing 10 years, XLV has returned an annualized 14.3%, outperforming the 12.9% return posted by the S&P 500. In terms of fees, the ETF costs an expense ratio of 0.1%, or around $10 in annual fees per $10,000 invested.
Vanguard Healthcare ETF (VHT)
Some investors might not like the concentrated nature of XLV, given that the fund only holds health care stocks represented in the S&P 500. For a more diversified approach, VHT might be better. This ETF tracks the Spliced U.S. Investable Market Health Care 25/50 Index, which holds 405 U.S. health care stocks. However, its largest holdings are still very similar to XLV, with names like UnitedHealth Group, Johnson & Johnson and Pfizer once again making up the top three. In terms of performance, VHT has returned an annualized 14.3% over the trailing 10 years, which is nearly identical to XLV. Given their similar portfolios and historical performance, a good use for VHT might be as a tax-loss harvesting partner for XLV. VHT also costs an expense ratio of 0.1%.
iShares Global Healthcare ETF (IXJ)
Investors interested in non-U.S. health care stocks can buy IXJ, which has a global focus. This ETF tracks the S&P Global 1200 Healthcare Sector Index, which holds a portfolio of 114 health care stocks mostly from the U.S. (72.8%), but also Switzerland, Japan, the U.K., Denmark, France, Australia and Germany. Notable foreign stocks include Novartis AG (NVS), Roche Holding AG (ROG.SW) and AstraZeneca PLC (AZN). Over a 10-year trailing period, IXJ has returned an annualized 12.3%, which is lower than XLV or VHT but understandable given the recent decade of U.S. stock outperformance. If international stocks outperform again in the future, as they did from 2000 to 2008, then IXJ could see stronger tail winds. However, the ETF does cost a higher expense ratio of 0.4%, likely due to the cost of indexing foreign equities.
ARK Genomic Revolution ETF (ARKG)
ARK Invest and its high-profile fund manager Cathie Wood are known for their suite of disruption-centered thematic funds, covering everything from next-generation internet, spaceflight and in the case of ARKG, genomics. This fund is actively managed and does not track a specific index. Rather, ARK’s team of analysts use fundamental analysis to screen and buy companies that they expect will be leaders or enablers in the biotechnology industry. These are often micro-, small- and mid-cap companies involved in target therapeutics, bioinformatics, molecular diagnosis, stem cell research and agricultural biology. Given its more speculative holdings and higher turnover, ARKG is a volatile, growth-oriented fund best suited for risk-tolerant investors. The ETF outperformed strongly in 2020 with a 180% return but fell in 2021 and 2022, giving back 33% and 42%, respectively. ARKG costs a higher expense ratio of 0.75% owing to the active management.
Invesco S&P 500 Equal Weight Health Care ETF (RYH)
One of the main criticisms of traditional market-cap-weighted index funds is that their performance tends to be influenced by a small number of large-cap stocks in the top holdings. To remedy this, investors can buy RYH, which tracks the S&P 500 Equal Weight Health Care Index. Like XLV, this index also tracks 65 health care stocks represented in the S&P 500. However, all of the holdings are assigned equal weights. This means that a massive company like Johnson & Johnson is weighted identical to a smaller company like Humana Inc. (HUM) at 1.7% each. Historically, this equal-weight approach has worked well, with RYH outperforming both XLV and VHT over a 10-year trailing basis with an annualized return of 14.7%. The ETF costs an expense ratio of 0.4%.
Direxion Daily Healthcare Bull 3X Shares (CURE)
Investors seeking amplified exposure to the health care sector can buy CURE, which is a leveraged ETF. CURE provides 3 times daily leverage to the returns of the Health Care Select Sector Index, the same one tracked by XLV. If the underlying index rises 1% in a day, CURE will gain 3%. If the index falls 1% in a day, CURE will lose 3%. The 3 times leverage target only applies for a single day though. Over long periods of time, the math of how compounding works can cause CURE’s long-term performance to deviate significantly from exactly 3 times of its underlying index. This is a highly volatile ETF best suited for risk-tolerant investors looking for a short-term trading instrument. CURE is also pricey, with a high expense ratio of 0.97%.
6 best health care ETFs to buy:
— Health Care Select Sector SPDR ETF (XLV)
— Vanguard Healthcare ETF (VHT)
— iShares Global Healthcare ETF (IXJ)
— ARK Genomic Revolution ETF (ARKG)
— Invesco S&P 500 Equal Weight Health Care ETF (RYH)
— Direxion Daily Healthcare Bull 3X Shares (CURE)
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Update 09/29/22: This story was previously published at an earlier date and has been updated with new information.