With new light being shined on the healthcare industry due to the recent mega-deal between Pfizer (PFE) and Allergan (AGN), and Presidential candidates raising concerns about the prescription drug companies gouging prices, there has never been a better time to start considering an investment in the healthcare industry. Increased concerns about price gouging by biotechnology and pharmaceutical companies, has lowered the share prices of these stocks, giving you a better entry point than in the recent past.
While in the past you may have avoided the industry due to it's crowded and overly complicated companies, using Exchange Traded Funds (ETFs) can help reduce single stock risk while spreading your money out over a more diverse group of stocks.
So let's take a look at 3 Healthcare ETFs that will help you limit your risk while still investing in the healthcare sector.
Health Care Select SPDR ETF (XLV)
The Health Care Select SPDR (XLV) is by far the largest healthcare sector-focused ETF with more than $13.75 billion assets under management. The Fund invests in all of the 55 health care stocks operating in the pharma, biotech, equipment and supplies, and healthcare providers and services industries which are in the S&P 500. The fund is market-cap weighted, causing it to lean heavily toward the mega-cap healthcare stocks such as Johnson & Johnson, Pfizer, Gilead Sciences, Merck & Co., and Allergan (XLV's top five holdings, in that order, which make up 34.57% of XLV).
XLV has an expense ratio of only 0.14%, an average spread of just 0.01%, and average daily volume of more than $1.3 billion, which makes the ETF very liquid and affordable. XLV also has a 1.39% dividend yield and has grown 5.22% year-to-date compared to just 1.57% for the S&P 500 as a whole. XLV's year-to-date outperformance of the S&P is despite trailing the broader indexes 7.78% gain over the last three months, compared to just a 1.61% increase. The past month has been especially good to XLV, as it gained 3.39% compared to the markets 0.99% rise.
Longer term, XLV has easily outperformed, gaining 30.17% over two years and 131.52% over five years compared to a 15.74% and 70.78% gain for the S&P 500 during the same timeframes.
The Health Care Select SPDR ETF is a great option for investors who are just trying to give the healthcare sector a try. Its focus on mega-cap companies, low cost, and dividend provide safety for the novice healthcare investor.
SPDR S&P Pharmaceuticals ETF (XPH)
While there will be some overlap with the XLV, the SPDR S&P Pharmaceuticals ETF (XPH) only offers exposure to pharmaceutical stocks, 41 at this time. Furthermore, XPH is equally weighted; meaning Johnson & Johnson, Pfizer, and the other mega-cap players in the industry have essentially the same weighting in the ETF as smaller pharma companies. This is also seen by many as a benefit of the fund since the smaller cap companies can provide higher growth rates in the short run.
The XPH has an expense ratio of 0.35%, but only $719 million assets under management, a yield of 1.25%, and a daily volume of only $14.6 million. In terms of performance, XPH is up 15.69% over the last month, but still down 4.19% over a three-month timeframe. Year-to-date it is trailing the S&P 500 by 0.2% while being negative 4.93% for 12 months. Over a longer period of two years, the XPH is up 24.5% and up 142.46% over five years (compared to 15.74% and 70.78% gain for the S&P 500).
SPDR S&P Biotech ETF (XBI)
Lastly, we have the SPDR S&P Biotech ETF (XBI) which is very similar to the XPH in its structure, but instead of focusing on pharma stocks, it has its attention on the biotechnology industry. The XBI has an equally weighted portfolio of 101 stocks with the top 10 holdings currently representing 14% of the ETF. This balance is much different than its competitor fund the iShares Nasdaq Biotechnology ETF (IBB) which has over 60% of its assets in its top 10 holdings while having over 140 total stocks within the fund. Furthermore, one of the main benefits of using ETFs to invest in risky sectors such as biotech stocks is to diversify your holdings more evenly, something XBI does very well.
XBI also has an expense ratio of 0.35%, a dividend yield of 1.73%, has over $2.2 billion in assets under management, and daily volume of nearly $370 million. From a performance standpoint, it is up 7.7% over the last month, but still down 2.27% over the last three months. It is up 14.17% year-to-date and 22.64% higher over the last 12 months. Over a two year period, XBI has risen more than 68% while climbing more than 255.84% during the past five years.
Final Thought
With all the different healthcare stocks and the highly technical nature of the industry, investing in healthcare can not only be very scary but very dangerous, especially when picking individual stocks. Using different ETFs to spread out the risk while still gaining exposure to an industry is not only a much easier way to invest, but likely a more intelligent way to invest considering the three ETFs mentioned above have all crushed the market over longer timeframes.
Matt Thalman
INO.com Contributor - ETFs
Follow me on Twitter @mthalman5513
Disclosure: This contributor held long positions in Johnson & Johnson at the time this blog post was published. This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.
