Healthcare ETFs saw plenty of fireworks in 2017, thanks in large part to Congress.
First, there was talk of a repeal of the Affordable Care Act — colloquially known as Obamacare. Then, healthcare stocks settled down after lawmakers failed to take action. Also, a controversial 2.3% tax on medical devices was temporarily suspended last year but is back as of Jan. 1.
As we enter 2018, it’s hard to know what’s ahead for regulation and legislation. But that shouldn’t deter investors from buying healthcare ETFs. After all, the closest thing you’ll get to a sure-thing growth investment right now is healthcare ETFs.
According to recent data from the Centers for Medicare & Medicaid Services, healthcare spending is roughly $10,000 per American. That adds up to some $3.2 trillion annually — a near-18% share of the entire U.S. economy, as a result. And with U.S. healthcare spending regularly growing between 5% and 10% annually, it’s one of the most reliable growth engines out there.
Healthcare is also a recession-proof expense. Americans will cut back on everything else before sacrificing their quality of life or longevity.
To help you play the big potential of this sector, here are seven healthcare ETFs that look promising for the rest of 2018 — and beyond.
Healthcare ETFs to Buy: Vanguard Healthcare ETF (VHT)
Expense Ratio: 0.10%, or $10 annually, per $10,000 invested
As with many ETF investing strategies, the first place to look is Vanguard for a diversified ETF at incredibly low cost. And that’s what the Vanguard Health Care ETF (NYSEARCA:VHT) provides.
With over 350 holdings, you’ll have a footprint in every subgroup within the healthcare industry. Just look at the top three holdings for an example of that diversification — consumer-health giant Johnson & Johnson (NYSE:JNJ), drug-maker Pfizer Inc. (NYSE:PFE) and insurer UnitedHealth Group Inc (NYSE:UNH).
And with expenses of 0.10% annually, the fund costs you just $1 each year for every $1,000 invested. That’s a small price to pay for all that diversification, making this one of the best healthcare ETFs for 2018 … and beyond.
Healthcare ETFs to Buy: Guggenheim Equal Weight Healthcare ETF (RYH)
Expense Ratio: 0.40%
A twist on Vanguard’s index fund for the sector is the Guggenheim S&P 500 Equal Weight Healthcare ETF (NYSEARCA:RYH).
The methodology of this Guggenheim ETF demands that no single position is worth significantly more than another; RYH only holds 62 total securities, and the fund regularly rebalances to make sure they all have an equal share of roughly 1.6%.
The result is a much better way to play the sector at large if you’re looking for true diversification. Since you are not overly reliant on a handful of stocks, the RYH fund smooths out any bumps in the road that individual companies may experience.
Just remember that the strategy does have a downside, since you’ll naturally be more dependent on smaller and more risky companies that get an equal seat at the table. The equal weighting works in your favor when things are rising, but could hurt more in a sector-wide downturn.
Healthcare ETFs to Buy: iShares Global Healthcare ETF (IXJ)
Expense Ratio: 0.48%
Another twist on conventional healthcare ETFs is to look beyond domestic stocks and take a more international view via the iShares Global Healthcare ETF (NYSEARCA:IXJ).
This global strategy puts Switzerland’s Novartis AG (ADR) (NYSE:NVS) and Germany’s Bayer AG (ADR) (OTCMKTS:BAYRY) on the list of holdings. However, this Healthcare ETF is still heavily focused on domestic medical investments; about two-thirds of the holdings are in American stocks. However, the ability to go after the biggest and best companies in the world allows this ETF to find top healthcare companies regardless of where they are headquartered.
If you’re worried about uncertainty in U.S. healthcare policy in the new year, this is a tactical way to play the global potential of healthcare instead of just the American slice of the pie.
Healthcare ETFs to Buy: Global X Longevity Thematic ETF (LNGR)
Expense Ratio: 0.68%
The Global X Longevity Thematic ETF (NASDAQ:LNGR) “seeks to invest in companies positioned to serve the world’s growing senior population.” Considering that the share of Americans over age 65 will rise to roughly 24% by 2060 from 15% today, it’s easy to understand the appeal of this fund.
Top holdings include diabetes powerhouse Novo Nordisk A/S (ADR) (NYSE:NVO) and Regeneron Pharmaceuticals Inc (NASDAQ:REGN), which has treatments for cancer and high cholesterol, among other products. These picks are set to profit from an increase in the elderly population, but there are also more unconventional holdings, including U.K. builder McCarthy & Stone, which specializes in senior housing.
This isn’t merely a long-term play that requires you to be patient to see success, however. During 2017, the fund returned about 30% to handily top the 20% or so delivered by the broader S&P 500 index.
Healthcare ETFs to Buy: iShares U.S. Healthcare Providers ETF (IHF)
Expense Ratio: 0.44%
The biggest winners after the death of proposed healthcare reforms earlier in 2017 — other than the millions of patients who get to keep their coverage — are insurance companies and direct service providers.
The healthcare exchanges have created more “customers” for insurers in the past few years, and the lack of reform to Medicare is a boon as well. UnitedHealth Group Inc (NYSE:UNH), Humana Inc (NYSE:HUM) and Aetna Inc (NYSE:AET) collectively cover almost half the Medicare Advantage marketplace, and all have really taken off after Republican legislative efforts collapsed.
The chance for another healthcare bill in 2018 is nil amid a tough midterm election year. And while nobody knows what Congress will look like in 2019, in the meantime you’re safe to invest in the iShares U.S. Healthcare Providers ETF (NYSEARCA:IHF). This healthcare ETF is made up of the biggest names in insurance, pharmacy-benefits giants, including Express Scripts Holding Company (NASDAQ:ESRX) and providers such as HCA Healthcare Inc (NYSE:HCA).
Healthcare ETFs to Buy: SPDR S&P Biotech ETF (XBI)
Expense Ratio: 0.35%
One of the most powerful ways to play high-growth companies creating the next generation of blockbuster drugs is the SPDR S&P Biotech ETF (NYSE:XBI), a fund that has soared about 40% in the last year.
Individual biotech stocks can be risky plays, soaring on positive drug trials or crashing after failure to get an FDA approval, and a diversified fund is a good way to smooth out the ride.
I prefer XBI to other biotech funds because it subscribes to a modified equal-weight index that prevents a single holding from representing too much of the portfolio. For instance, right now the largest holding is only 3% of its total. Compare that with the popular iShares Nasdaq Biotechnology ETF (NASDAQ:IBB), where the top three holdings represent a whopping 25% of the portfolio.
XBI is cheaper to boot, with a gross annual expense ratio of 0.35%, or $35 on every $10,000 you invest.
If you want to play biotech, you want the picks with the greatest potential. And the methodology behind XBI ensures you have more of your assets in small, up-and-coming companies that might break out the most.
Healthcare ETFs to Buy: iShares Medical Devices ETF (IHI)
Expense Ratio: 0.44%
A twist on the biotech theme is to play medical devices. While there is a ton of money to be made on breakthrough drugs, there are also plenty of patented medical technologies that are equally lucrative because they allow for better patient outcomes using cutting-edge design.
That’s exactly what the iShares U.S. Medical Devices ETF (NYSEARCA:IHI) is trying to tap into. Top holdings include Medtronic PLC. Ordinary Shares (NYSE:MDT), which specializes in cardiovascular technologies, lab-equipment provider Thermo Fisher Scientific Inc. (NYSE:TMO) and Intuitive Surgical, Inc. (NASDAQ:ISRG) which makes equipment for robotic-assisted surgery.
Those stocks rallied on hopes that Obamacare’s medical-device tax would be rolled back, but don’t let that fool you into thinking they don’t have potential. These are high-growth companies, and the IHI fund has surged over 30% in the last year.
That growth in the face of the return of a 2.3% tax on medical devices in the U.S. is noteworthy — because any relief could really juice the sector even further in 2018.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP. As of this writing, he did not hold a position in any of the aforementioned securities.
