Investors who are unsure, or even anxious, about the stock market heading into the last month of the year might want to check up on the health care sector — particularly health care exchange-traded funds, or ETFs.
The reasons for doing so are off the charts. Health care funds offer a strong dose of defense, diversification and long-haul growth as the sector continues to produce new drugs, medical-device products and treatments on a reliable basis.
Investors can choose a broad-based health care ETF that’s loaded up with pharmaceutical, biotechnology, and life sciences, sector services and medical-device companies. Or, they can opt for an industry-specific stock that specializes in any of the health care fields listed above.
[Sign up for stock news with our Invested newsletter.]
“Health care ETFs and stocks are often considered defensive during market downturns, as people generally continue to require health care services regardless of economic conditions,” says Michael Ashley Schulman, chartered financial analyst and chief investment officer at Running Point Capital Advisors, a multifamily financial planning company in El Segundo, California. “In that scenario, investors may buy health care stocks as a protective strategy to mitigate risks during economic recessions or broader market declines, as health care demand is not highly cyclical.”
Investor interest can also be driven by specific opportunities “such as positive health care industry trends, breakthrough medical advancements, aging population demographics, pandemics, or regulatory changes that could potentially increase demand for health care products and services,” Schulman adds.
If you’re looking to add a hardy health care ETF to your investments heading into 2024, there’s no shortage of qualified candidates. These six ETFs could be the right prescription for your portfolio now:
| Health care ETF | Expense ratio | 12-Month Yield |
| iShares Global Health Care ETF (ticker: IXJ) | 0.42% | 1.37% |
| Vanguard Health Care Index Fund (VHT) | 0.1% | 1.55% |
| Health Care Select Sector SPDR Fund (XLV) | 0.1% | 1.71% |
| Invesco S&P 500 Equal Weight Health Care ETF (RSPH) | 0.4% | 0.76% |
| SPDR S&P Biotech ETF (XBI) | 0.35% | 0.2%* |
| iShares U.S. Medical Devices ETF (IHI) | 0.4% | 0.58% |
*30-day SEC yield as of Nov. 27; 12-month yield is zero.
iShares Global Healthcare ETF (IXJ)
This prominent health care fund doesn’t pull any punches, as it invests in some of the most recognizable health care companies in the world.
UnitedHealth Group Inc. (UNH), Eli Lilly & Co. (LLY) and Johnson & Johnson (JNJ) lead that list, composing just over 20% of the fund as of late November. The fund also offers a modest 0.42% net expense ratio, while also tossing a decent dividend yield of 1.4% into the mix for income-minded investors.
IXJ is down 1.8% on a year-to-date basis including reinvested dividends, which is quite rough compared with the S&P 500, which has returned 18.6% as of Nov. 28. As far as stability goes, however, iShares Global Healthcare ETF has proven to be a reliable option for investors who are skittish about volatile markets and shaky economies, and it should continue its solid course into 2024.
“Most health care funds tend to put more focus on U.S. companies,” says Glenn Tompkins, senior global market strategist at VectorVest Inc., a stock analysis and portfolio management platform. “This fund puts some emphasis on international companies, which comprise about 30% of fund holdings, which opens the door to more diversification.”
The fund includes global names like Novo Nordisk A/S (NVO), Novartis AG (NVS) and AstraZeneca PLC (AZN). “The great thing about these companies is that they are not fly-by-night companies. They are well-established companies and worth the investment,” Tompkins says.
Vanguard Health Care Index Fund (VHT)
Vanguard offers investors a robust health care ETF that’s been around for almost 20 years (it hits that milestone in January). The fund features a low expense ratio of 0.1% and a straightforward investment approach; it basically mirrors the performance of the MSCI US Investable Market Health Care 25/50 Index, which comprises U.S.-based health care stocks.
A larger fund, with more than $15 billion in assets under management, Vanguard Health Care Index Fund is well placed to benefit from the massive rise in U.S. health care spending, which is estimated to grow an average of 5.4% per year from 2022 to 2031. That should outpace gross domestic product growth and reach 19.6% of the U.S. economy by 2031, according to the Centers for Medicare & Medicaid Services. National health care spending is expected to balloon from $4.4 trillion in 2022 to an estimated $7.2 trillion in 2031.
The fund is down slightly so far in 2023, but it has generated a 10.5% annual return over 10 years as of Oct. 31.
Health Care Select Sector SPDR Fund (XLV)
This health care fund giant is down 3.4% on a year-to-date basis, but it’s battled back in the past 30 days, gaining 5.3% as of Nov. 28.
The fund, which celebrates its 25th birthday on Dec. 16, offers defensive-minded investors expanded exposure to the health care sector. At $36 billion in assets under management, XLV is one of the larger health care ETFs. It’s passively managed, meaning it tracks the performance of the Health Care Select Index. It also means that, as a passively managed fund, XLV offers low fees (a 0.1% expense ratio), higher transparency and lower risk, at least when measured against funds in sectors such as technology or energy.
The top three holdings in XLV are familiar names: UnitedHealth Group, Eli Lilly and Johnson & Johnson, which make up about 28% of the fund’s holdings.
This fund “looks at every health care piece of the S&P 500 index,” says Tompkins. “This is a great ETF if you want to have a piece of all the major players in this sector.”
[See: 7 Best ETFs to Buy Now.]
Invesco S&P 500 Equal Weight Health Care ETF (RSPH)
This Invesco-managed fund tracks the S&P 500 Equal Weight Health Care Index. It’s a “pure play” fund, with 100% of its holdings in health care-specific companies like UnitedHealth Group, Centene Corp. (CNC) and pharmacy giant CVS Health Corp. (CVS).
The fund holds about $847 million in total net assets, and though it has struggled a bit this year, it has reversed course significantly in the last month as investors have leaned into more defensive investments toward the end of the calendar year.
RSPH also offers a 0.76% dividend yield, and it has a four-year average yield of 0.6%. That said, dividends have risen at a 15.6% compound annual growth rate over the past three years, thus giving fund investors some cash incentive to stay with the fund.
SPDR S&P Biotech ETF (XBI)
With its unfortunate exposure to Silicon Valley Bank’s demise last March, XBI has had a rough go of it in 2023, with the fund down 12% for the year as of Nov. 28. With the banking crisis melting away, at least in the public eye, XBI has roared back in the past month, gaining about 14% in that time frame.
In the absence of another hard-and-fast reason for the rebound, Wall Street analysts say an overall sense that the Federal Reserve is done hiking interest rates, combined with a stronger performance from smaller life sciences companies (the Russell 2000 is up 10% in the past month), means that SPDR S&P Biotech ETF is on a cleaner glidepath heading into 2024.
The SPDR fund uses 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 smaller fund holdings on an upward march, that’s enough to stabilize XBI in an otherwise entirely forgettable 2023.
iShares U.S. Medical Devices ETF (IHI)
This $4.6 billion, passively managed ETF 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 0.4%.
Fund performance is down about 5% year to date, but like many health care ETFs, IHI has experienced a rebound in November, with the fund up 12% over the past 30 days. Why the uptick? One big reason is that the medical supply industry has fixed its two-year-long supply chain problems.
An issue vexing medical supply companies is weight loss drugs, such as Ozempic, which seem to be effective. If weight loss drugs prove reliable and durable in combating obesity, then the need for heart disease procedures and sleep apnea protocols may be significantly reduced. Now analysts say industry fears of weight loss drugs cutting into medical device profits are overblown, as many individuals may not be able to afford or qualify for the pricey drugs.
More from U.S. News
What’s the Best Treasury ETF? 7 Options for Investors
6 Best Green Hydrogen Stocks and ETFs to Buy Now
6 Best Health Care ETFs to Buy for 2024 originally appeared on usnews.com
Update 11/29/23: This story was previously published at an earlier date and has been updated with new information.
