Best healthcare ETFs: Top biotech, pharma and medical funds

  • By James Royal,
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If you’re looking to invest in the healthcare industry, buying a healthcare exchange-traded fund (ETF) is an easy way to get started without having to do all the work of analyzing individual companies. With a healthcare ETF you can buy a broad cross-section of the industry or even chop it into finer segments. Either way, you can find the group of stocks that you want to own. An ETF also offers diversification, reducing your risks compared to buying individual stocks.

Healthcare presents significant avenues for growth, too. As people live longer than ever before, medicine has a host of diseases to fight, whether it’s cancer, heart disease, Alzheimer’s, stroke or others. It also includes emerging diseases such as COVID-19 and yet-to-be encountered ailments. And U.S. healthcare spending has been above-trend for decades. From 2010 to 2019, healthcare spending per capita grew 3.7 percent annually compared to 3.4 percent growth for the U.S. economy as a whole, according to Peterson-KFF’s Health System Tracker.

So a healthcare ETF could offer an attractive way to invest in a resilient sector of the economy. Of course, the best investments for beginners also offer tons of options for all kinds of investors.

What are the main types of healthcare ETFs?

The healthcare sector is large, and it can be broken down into sub-sectors, depending on the exact kind of businesses within it. So you have multiple ways to invest in healthcare, and a healthcare ETF can give you exposure to these sectors:

  • Broad healthcare – This grouping includes the many kinds of healthcare sub-sectors listed below, so you can get wide exposure to healthcare as a whole.
  • Biotechnology – This sub-sector includes companies specializing in biotechnology and similar drugs. It’s an exciting field with the potential for explosive returns.
  • Medical devices – This sub-sector focuses on providing medical devices, such as implants, or other medical equipment.
  • Healthcare providers – This sub-sector includes companies that actually deliver care to individuals.
  • Pharmaceuticals – This group includes companies that develop traditional drugs, as opposed to biotech companies.

So you have quite a few options to pick from, depending on exactly what you want. But if you want a cross-section of everything that’s healthcare-related, you’ll want to look at an ETF labeled as broad healthcare.

What to look for in an ETF

When investing in ETFs, it’s useful to look at a few aspects of each ETF so that you actually buy what you intended to buy. Here are three key things to look for:

  • The sub-sector – Each sub-sector may respond differently to conditions in the industry. For example, drug companies respond differently than healthcare providers to certain developments in the industry, since both rely on different funding sources. So you need to know what kinds of companies you want to own.
  • The investment track record – You’ll also want to know the track record of the ETF. Has it outperformed the industry, or has it underperformed during a period of strength? The track record can give you some idea of what to expect from the ETF.
  • The expense ratio – Also, pay attention to the expense ratio, which tells you how much it costs to own the fund annually as a percent of your total investment in it.

Finally, it’s worth noting that larger ETFs tend to charge lower expense ratios, because they can spread the costs of running the fund across more assets. So the cheapest funds may often be the largest funds, and a low expense ratio is a key measure of what makes a top ETF.

Here are some of the best healthcare ETFs based on their sub-sectors.

Best healthcare ETFs

1. Best broad healthcare ETF

Health Care Select Sector SPDR Fund

This ETF (XLV) tracks the Health Care Select Sector index, and includes healthcare companies in the Standard & Poor’s 500 index (.SPX). The index includes companies in pharmaceuticals, equipment and supplies, healthcare providers and biotechnology, among others.

5-year returns (annualized): 14.0 percent (as of Sept. 30, 2021)

Expense ratio: 0.12 percent

Dividend yield: 1.4 percent

2. Best biotechnology ETF

iShares Nasdaq Biotechnology ETF

This fund (IBB) tracks an index of biotechnology and pharmaceutical stocks listed on the NASDAQ stock exchange, with top holdings including Amgen (AMGN), Gilead Sciences (GILD) and Moderna (MRNA).

5-year returns (annualized): 11.1 percent (as of Sept. 30, 2021)

Expense ratio: 0.45 percent

Dividend yield: 0.2 percent

3. Best medical devices ETF

iShares U.S. Medical Devices ETF

This ETF (IHI) tracks an index of U.S.-listed stocks of medical device companies, including Abbott Laboratories (ABT) and Thermo Fisher Scientific (TMO).

5-year returns (annualized): 21.4 percent (as of Sept. 30, 2021)

Expense ratio: 0.41 percent

Dividend yield: 0.2 percent

4. Best healthcare providers ETF

iShares U.S. Healthcare Providers ETF

This fund (IHF) tracks an index of U.S.-listed providers of healthcare, including UnitedHealth (UNH), CVS Health (CVS) and Cigna (CI).

5-year returns (annualized): 17.0 percent (as of Sept. 30, 2021)

Expense ratio: 0.42 percent

Dividend yield: 0.5 percent

5. Best pharmaceuticals ETF

iShares U.S. Pharmaceuticals ETF

This ETF (IHE) tracks an index of U.S.-listed pharmaceutical companies, and it includes the stocks of Johnson & Johnson (JNJ), Pfizer (PFE) and Merck (MRK).

5-year returns (annualized): 5.6 percent (as of Sept. 30, 2021)

Expense ratio: 0.42 percent

Dividend yield: 1.3 percent

Bottom line

If you’re looking for exposure to healthcare, you have several options depending on the sub-sector you want to tie your money to. If you don’t know which to buy, you can invest in an ETF focused on the broad industry and gain total exposure. While you don’t necessarily need to know a lot to succeed with an ETF, some investors stick to broadly diversified index funds, such as those based on the S&P 500 index, and leave trading and fund-picking to the pros.

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