Here are six of the best health care ETFs to buy today.
An important component of the U.S. market is the health care sector, which is composed of companies that develop, produce or sell pharmaceuticals and medical equipment, operate medical facilities or provide health care services. Within the S&P 500, health care sector stocks currently hold a 15.3% allocation, coming in second after technology. Historically, this sector has been resilient during various market corrections, exhibiting lower volatility and drawdown. The sector’s defensive nature stems from its essential nature and the relatively inelastic demand for health care services and products. Thus, overweighting, or “tilting” health care stocks in a portfolio could be a way to capture returns while lowering risk. A great way to access diversified portfolios of health care stocks is via sector exchange-traded funds, or ETFs. Here are six of the best health care ETFs to buy in 2023.
iShares Global Health Care ETF (ticker: IXJ)
A straightforward way of accessing over 100 market-cap-weighted global health care stocks is via IXJ, which tracks the S&P Global 1200 Health Care Sector Index. Around 71% of this ETF is held in U.S. health care stocks like UnitedHealth Group Inc. (UNH), Johnson & Johnson (JNJ) and Merck & Co. Inc. (MRK). The remaining 29% is concentrated in foreign health care stocks — largely in the eurozone — like Novartis AG (NVS), Roche Holding AG (ROG.SW) and AstraZeneca PLC (AZN). Investors who wish to diversify globally may prefer this ETF despite it still being overweighted in U.S. stocks. In terms of fees, IXJ charges an expense ratio of 0.4%. As of Dec. 31, 2022, the ETF had a 10-year annualized return of 12% with distributions reinvested.
Vanguard Health Care ETF (VHT)
Investors wishing to focus solely on U.S. health care stocks can buy VHT for a low-cost, diversified holding. This ETF holds 420 market-cap-weighted health care stocks by tracking the Spliced U.S. Investable Market Health Care 25/50 Index. Its top holdings include UnitedHealth Group, Johnson & Johnson and Eli Lilly & Co. (LLY), with these three companies comprising more than 21% of the ETF. Because the ETF is market-cap weighted, its performance tends to be dominated by the top large-cap holdings. Over the trailing 10 years, VHT has returned 14.8% annualized, beating IXJ thanks to the outperformance of U.S. stocks, but this shouldn’t be used as a predictor of the ETF’s future performance. The ETF also charges a much lower expense ratio of 0.1%.
Health Care Select Sector SPDR ETF (XLV)
Investors seeking the brand name recognition of the S&P 500 can opt for XLV, one of State Street’s 11 “Select Sector” ETFs. In this case, XLV tracks the 64 health care sector stocks found in the S&P 500. Compared to VHT, XLV holds a slightly more more concentrated, large-cap-heavy portfolio. That being said, the two ETFs have similar overall top holdings and have performed virtually identically over the last 10 years, with XLV returning 14.9%. Therefore, a great use for XLV is as a potential tax-loss harvesting partner for VHT, and vice-versa. XLV also charges a 0.1% expense ratio.
Invesco S&P 500 Equal Weight Health Care ETF (RYH)
Because XLV and VHT are market-cap weighted, their performance tends to be dominated by a handful of large-cap stocks. While this is the default approach for many ETFs, it can potentially lead to concentration risk and under-diversification. An alternative is an equally-weighted health care ETF like RYH, which tracks the S&P 500 Equal Weight Health Care Index. RYH targets a roughly equal allocation for each of its 64 holdings, regardless of their individual valuation. For instance, the default weight of a large-cap stock like United Health is about 1.6%, the same as a smaller stock like Elevance Health Inc. (ELV). Over the past 10 years, RYH just barely outperformed both XLV and VHT with a 15% annualized return. However, the equally weighted methodology results in greater fund turnover and a higher expense ratio of 0.4%.
SPDR S&P Biotech ETF (XBI)
Investors wishing to target a specific industry in the health care sector like biotechnology can buy XBI, which tracks the S&P Biotechnology Select Industry Index. This ETF uses a modified equal weighting methodology to ensure better diversification between small-, mid- and large-cap biotech stocks. The majority of XBI’s holdings are pharmaceutical companies like Madrigal Pharmaceuticals Inc. (MDGL), Exact Sciences Corp. (EXAS) and Acadia Pharmaceuticals Inc. (ACAD). Compared to a regular health care sector ETF, XBI is slightly more volatile given the capital-intensive nature of the industry. The ETF charges a 0.35% expense ratio.
iShares US Medical Devices ETF (IHI)
Another industry within the health care sector that investors can gain exposure to is medical equipment. IHI tracks the Dow Jones U.S. Select Medical Equipment Index, which holds 64 U.S. companies that manufacture and distribute medical devices. Notable top holdings include Thermo Fisher Scientific Inc. (TMO), Abbott Laboratories (ABT) and Medtronic PLC (MDT). Over the past 10 years, the medical equipment industry has outperformed the broad health care sector, with IHI returning an annualized 17.2%. However, IHI is more expensive than a broad health care sector ETF, with a 0.39% expense ratio.
Best health care ETFs to buy now:
— iShares Global Health Care ETF (IXJ)
— Vanguard Health Care ETF (VHT)
— Health Care Select Sector SPDR ETF (XLV)
— Invesco S&P 500 Equal Weight Health Care ETF (RYH)
— SPDR S&P Biotech ETF (XBI)
— iShares US Medical Devices ETF (IHI)
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Correction 01/24/23: This story was previously published at an earlier date and has been updated with new information.