Vanguard Health Care ETF (NYSEARCA:VHT) has a mandate to track the MSCI US Investable Market 25/50 Index, which is a benchmark that contains large-, mid- and small-cap healthcare stocks.
The exchange-traded fund is what is known today as a passive fund, meaning that it tracks an index and holds similar stocks to replicate the performance.
Passive funds have been the way to go for a number of years, and VHT is no exception.
Its averaged nearly 17% annually for the past five years and nearly 10% annually since its inception in 2004. And during these time frames it has regularly outperformed the index it’s tracking.
What’s more, like all Vanguard funds, its expense ratio is unbelievably low, which means you get to keep more of the returns. VHT annual expenses are 0.1%. Its competitors’ average expenses are 1.33%. That’s an order of magnitude difference. And over time that really adds up.
For example, over 10 years, you end up paying 1% of your returns to expenses or 13.3%. This is what makes Vanguard funds so compelling for long-term investors. Great performance at industry-low costs.
Its portfolio is well positioned for whatever happens with Obamacare in coming quarters. One-third of the stocks are pharmaceuticals. Its top three holdings are Johnson & Johnson (NYSE:JNJ), Pfizer Inc. (NYSE:PFE) and Merck & Co., Inc. (NYSE:MRK).
There’s only one insurance company in its top 10 holdings, powerhouse UnitedHealth Group Inc (NYSE:UNH). The insurers are the sector that will undergo the most transition in any new healthcare legislation that get passed since they will be the ones offering the plans and figuring out their margins on a new system. “Trumpcare” may work in their favor, but the uncertainty in the meantime will not help them.
The drug companies, especially the big ones, are less prone to market shocks with any new Trumpcare legislation since they have longstanding deals on their biggest selling drugs. Any changes would be years off.
Bottom Line on the VHT ETF
VHT also has a sizable position in healthcare equipment firms. This market is the biggest growth engine in the sector, as China looks to build out its healthcare system and needs to buy equipment now so it can provide for its citizens.
Only after building its knowledge base on operating, maintaining and installing this equipment will it be able to build its own domestic healthcare equipment firms. This first wave will be established Western equipment firms with the ability to serve a massive market like China.
Year to date, VHT is up 10% and has an unremarkable 1.3% dividend. But considering basement expense ratio, that dividend pays the expenses with plenty to spare, unlike its competitors. There is plenty of growth left in this quality ETF.
Richard Band’s Profitable Investing advisory service helps retirement savers outperform the market without losing a minute of sleep along the way. His straightforward style and low-risk value approach has won seven Best Financial Advisory awards from the Newsletter and Electronic Publishers Foundation.