When the economy is wheezing along at a glacial pace and the stock market is highly volatile, smart investors turn to so-called defensive stocks that can weather economic storms and keep portfolios stabilized in times of market peril. One stabilizing industry, in particular, is health care, where consumer demand for products and services is high in both calm and chaotic economies.
[Sign up for stock news with our Invested newsletter.]
Health care takes that “defense” concept one step further by giving investors access to a diverse range of health care stocks that, bundled together, can reduce outsized investment risk and still provide solid returns. That was certainly the case this spring, as the benchmark iShares U.S. Healthcare ETF (IYH) outperformed the S&P 500 by about 14%. So far in 2023, the economic situation continues to favor health care exchange-traded funds, especially the six solid funds listed below:
| Health Care ETF | Expense ratio |
| iShares Global Health Care ETF (ticker: IXJ) | 0.40% |
| Vanguard Health Care Index Fund (VHT) | 0.10% |
| Health Care Select Sector SPDR Fund (XLV) | 0.10% |
| Invesco S&P 500 Equal Weight Health Care ETF (RYH) | 0.40% |
| SPDR S&P Biotech ETF (XBI) | 0.35% |
| iShares US Medical Devices ETF (IHI) | 0.39% |
iShares Global Healthcare ETF (IXJ)
This ETF looks to correspond generally to the price and yield performance of the S&P Global Healthcare Sector Index. It’s loaded with brand-name health care stocks including UnitedHealth Group Inc. (UNH), Johnson & Johnson (JNJ), Eli Lilly & Co. (LLY) and Merck & Co. Inc. (MRK). IXJ is highly focused on three health care categories worth following for investors: pharmaceutical, biotechnology and medical device companies. The fund is up 1.5% against -3.8% for its category index on a year-to-date basis, and the expense ratio is manageable at 0.40%. The ETF also pays a 99-cent annual dividend.
Vanguard Health Care Index Fund (VHT)
With $17 billion in assets under management, this fund is one of the most widely purchased health care ETFs, and with 406 stocks, it’s also one of the largest health care fund baskets. The ETF looks to mirror the performance of the MSCI US Investable Market Health Care 25/50 Index, which comprises U.S.-based health care stocks.
From a cost perspective, VHT is one of the most affordable health care ETFs, with a 0.10% expense ratio. While the fund is down 1.13% so far in 2023, it has generated a 12.7% annual return over 10 years, besting its category index and competitors like IXJ.
Health Care Select Sector SPDR Fund (XLV)
Investing in health care means investing in one of the steadiest growth sectors in the U.S. For example, the health care industry has averaged 47,000 new jobs per month since November 2022, adding some more luster in sector ETFs like XLV. That increase slowed a bit in April, to 40,000 new jobs in the health care sector.
The fund, which focuses primarily on health care service providers, biotech and pharma, has $40 billion in assets under management and holds 67 stocks, lower than the category average, with UnitedHealth making up 9.2% of assets. The fund’s noncyclical, defense-minded structure provides stability for anxious investors while its long-term fundamentals are robust.
While year-to-date returns are off, at -2.18% as of May 11, a 10-year annual trailing performance of 12.7% reinforces the fund’s long-term dependability. Having a low 0.10% expense ratio doesn’t hurt either.
[READ: How This 25-Year-Old Makes $500k a Year With His Newsletter Business]
Invesco S&P 500 Equal Weight Health Care ETF (RYH)
This balanced health care ETF tracks the S&P 500 Equal Weight Health Care Index, which steers fund managers toward an equally weighted menu of 66 stocks, independent of their valuations. Health care stocks compose almost 100% of the fund, making RYH an intriguing option for investors who seek a “pure play” in the health care sector.
The fund is widely popular, and its dividend story is solid as well. RYH has a four-year average dividend yield of 0.6%, but its dividends have risen at a 15.6% compound annual growth rate over the past three years. The fund has returned 1.6% year to date as of May 11, and it has a 12.6% trailing annual return over the past 10 years. It also has a competitive expense ratio of 0.40%.
SPDR S&P Biotech ETF (XBI)
Earlier this year, the SPDR S&P Biotech ETF was tainted by its overexposure, especially with biotech stocks, to the failed Silicon Valley Bank. By March 10, XBI had fallen to a nearly six-month low. The fund has bounced back nicely in the interim, with a 3.6% year-to-date return through May 11 and a 36.9% return on a year-to-year basis. Like RYH, the SPDR fund leverages a modified equal weighting investment strategy to strike an optimal balance between small-, mid- and large-cap stocks, with an emphasis on biopharma stocks.
With the inclusion of so many smaller and midsize pharma companies, XBI may be riskier than the average health care ETF, but with demand up for biopharma stocks in 2023, some of that risk seems to have dissipated. The fund’s expense ratio stands at 0.35%.
iShares US Medical Devices ETF (IHI)
The medical-equipment market is growing by leaps and bounds, with an 8.6% projected growth rate in 2023. That performance is no outlier, as medical equipment continues a long-term pattern of outperformance, thus giving funds like IHI a big boost. The passively managed IHI tracks the Dow Jones U.S. Select Medical Equipment Index, which holds 64 U.S. companies that manufacture and distribute medical devices, and it has a reasonable expense ratio of 0.39%.
Now that medical supply companies are emerging from a long supply chain slump, top-line health care fund anchors like Thermo Fisher Scientific Inc. (TMO), Abbott Laboratories (ABT) and Medtronic PLC (MDT) will keep this ETF rolling in the second half of 2023. The fund is up 5.8% on a year-to-date basis as of May 11 and is up 16.1% on a 10-year trailing annual return basis. That’s well ahead of its tracking index.
More from U.S. News
ETF vs Mutual Fund: How to Choose for Your Investing Strategy
7 Dividend ETFs for Retirement Investors
7 of the Best ETFs to Fight Inflation
6 Best Health Care ETFs to Buy Now originally appeared on usnews.com
Update 05/12/23: This story was previously published at an earlier date and has been updated with new information.
