ETFs: 3 Ways to Play the Boom in Healthcare Stocks

Healthcare stocks have remained among the best-performing stocks in 2015 as the sector continues to benefit from ongoing trends, such as the discovery of new drugs, growing demand in emerging markets, mergers and acquisitions, and ever-increasing healthcare spending.

stocks to buy healthcare stocksObamacare has also helped wrangle more people under some type of health insurance, which has brought more customers to health insurance companies and deeper margins to hospitals.

Fred Weiss, a portfolio manager with Atlantic Trust Private Wealth Management, told CNN:

“Most hospitals have had rising margins the past few years from Obamacare. So if they were making 12% margins, now they make 16%. That’s 30% more profits.”

Twenty-four out of 28 healthcare exchange-traded funds have made positive gains over the past 12 months. The broad Health Care SPDR Fund (XLV) is up 12% year-to-date, easily eclipsing the S&P 500 Index, which has only managed to post a 2.6% YTD return. And, as usual, biotech stocks remain the best performing healthcare stocks.

But which ETFs are the best funds for getting into healthcare’s increasingly lucrative returns? Let’s take a look at three of your best options.

Best ETFs for Healthcare Stocks: SPDR S&P Biotech ETF (XBI)

Best ETFs for Healthcare Stocks: SPDR S&P Biotech ETF (XBI)Assets Under Management: $2.9 billion
Expense Ratio: 0.35%
YTD Return: 35%

If you are one of the investors that has continued to sit on the sidelines for fear that the easy money in biotech has already been made, then you might be missing out on a good chance to capitalize on current popularity of the industry.

The SPDR S&P Biotech ETF (XBI) does not seem to be running out of gas. XBI is up 76% over the past year as of this writing, which is nearly 20% better than the second-place ETF in healthcare, the First Trust NYSE Arca Biotechnology Index Fund (FBT), sporting a 56% return over the same period.

XBI represents the biotechnology sub-industry portion of S&P Total Market Index, and with about 70 biotech companies under management, it’s well diversified within the sector. XBI’s expense ratio of 0.35% is fairly low, making it an attractive investment option if you’re wild about biotech stocks right now.

Overvaluation concerns remain a major cause of worry in the biotech and tech industries in general, and a broad market correction can lead to plenty of volatility. Therefore, it’s best to balance your biotech holdings with holdings from other healthcare industries.

Best ETFs for Healthcare Stocks: iShares U.S. Healthcare ETF (IYH)

Best ETFs for Healthcare Stocks: iShares U.S. Healthcare ETF (IYH)Assets Under Management: $2.7 billion
Expense Ratio: 0.45%
YTD Return: 14%

The iShares U.S. Healthcare ETF (IYH) allocates 92% of its 106 holdings to healthcare, providing solid coverage of the industry. Of those, Big Pharma eats up 40% of the fund, biotech snags 23%, healthcare equipment takes 14% and managed healthcare gets a 9% allocation.

The fund is fairly concentrated at the top. IYH’s three biggest holdings — Johnson & Johnson (JNJ), Pfizer (PFE) and Gilead Sciences (GILD) — alone account for 20% of the fund, and its top holdings make up roughly half of the fund’s weight.

IYH is a solid healthcare ETF for investors who feel they cannot stand the volatility of pure-play biotech funds.

IYH is up 25% in the last year, and has surged more than 175% in the last five years.

Best ETFs for Healthcare Stocks: PowerShares Dynamic Healthcare Sector Portfolio (PTH)

Best ETFs for Healthcare Stocks: PowerShares Dynamic Healthcare Sector Portfolio (PTH)Assets Under Management: $254 million
Expense Ratio: 0.6%*
YTD Return: 21%

For investors who would like to have a healthy mix of large, mid- and small-cap healthcare stocks, then PowerShares Dynamic Healthcare Sector Portfolio (PTH) is cut just right for them.

With 49 healthcare stocks in its basket, the PTH has a fairly well-balanced mix of about 40% large caps, 29% mid-caps and 30% small-cap healthcare stocks. The fund also is moderately diversified, with its top 10 holdings making up 26% of its value. Regeneron (REGN), Allergen (AGN) and Cigna (CI) are the fund’s three largest holdings, accounting for about 15% of its value.

This fund is not as popular with investors — which could be in part because of its relatively high expense ratio — but it’s still a quality healthcare ETF for investors with a medium tolerance for risk.

*Note: PTH’s expenses include a 0.08% waiver that will last at least until Aug. 31.

As of this writing, Brian Wu did not hold a position in any of the aforementioned securities.

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