If you haven’t noticed, our personal health is kind of a big deal right now. But even if you can put Covid-19 to the side for a moment, there are trillions of reasons to invest in healthcare exchange-traded funds (ETFs). In 2018, U.S. healthcare spending was $3.6 trillion. That was a 4.6% year-over-year increase. According to the Centers for Medicare and Medicaid Services, “National health spending is projected to grow at an average annual rate of 5.4 percent for 2019-28 and to reach $6.2 trillion by 2028.”
And this spending is being fueled by two important trends. First, we’re getting older. That’s not new to most people, but let’s be honest. Older people require more medical care. The second reason is because there are breakthrough discoveries that continue to be made every year. Yes, we’re all intensely focused on the novel coronavirus at the moment, but there is still progress being made in cancer treatment. And robotics continues to change the look of many elective surgery procedures.
But investing in healthcare stocks can be tricky. For one thing, it’s an extremely broad category. So in order to maximize your benefit while minimizing risk, many investors turn to exchange-traded funds (ETFs) that focus on healthcare.
The biggest benefit for investing in healthcare ETFs is the diversification they provide. Rather than selecting individual healthcare stocks, you’re investing in a basket of the best healthcare stocks. And if you really want to zero in on a specific niche — like biotech stocks, for example — there are healthcare ETFs that are concentrated in just those areas.
Here are seven of the top healthcare ETFs that should continue growing into 2021.
- ARK Genomic Revolution Multi-Sector ETF (NYSEARCA:ARKG)
- SPDR S&P Health Care Equipment ETF (NYSEARCA:XHE)
- Fidelity MSCI Health Care ETF (NYSEARCA:FHLC)
- KraneShares MSCI All China Health Care Index ETF (NYSEARCA:KURE)
- Invesco S&P 500® Equal Weight Health Care ETF (NYSEARCA:RYH)
- Invesco DWA Healthcare Momentum ETF (NASDAQ:PTH)
- iShares US Medical Devices ETF (NYSEARCA:IHI)
Let’s look at what makes each of these an interesting option.
Healthcare ETFs: ARK Genomic Revolution Multi-Sector ETF (ARKG)
Expense ratio: 0.75%, or $75 annually per $10,000 invested.
Total assets: $515 million
One of the most promising segments of the healthcare sector is genetics. Specifically, obtaining a deeper understanding of the human genome that will allow companies to successfully modify our DNA. The potential to treat a variety of diseases is immense. But so is the risk. And that risk is amplified when you try to pick individual healthcare stocks in this sector.
The ARKG fund is an actively managed fund comprised mostly of large-cap stocks. The fund helps manage the inherent risk of this sector and has built an exceptional record of consistently outperforming the market. It does this by identifying companies that are on the leading edge, and therefore most likely to profit from, advances in critical areas such as stem cell research, gene editing, genetic therapy and molecular diagnostics.
After plummeting in March along with most funds, the stock has surged forward and is now up over 65% for the year.
SPDR S&P Health Care Equipment ETF (XHE)
Expense ratio: 0.35%
Total assets: $523 million
One criticism of many healthcare ETFs is that they are actively managed. However, according to Steve Chiavarone, a portfolio manager, equity strategist and vice president at Federated Hermes, investors need that level of stock picking to help them find the winners.
And according to Chiavarone, those winners are likely to be the companies that get us through our current pandemic. And that’s a lot of companies. In fact, over 70 Covid-19 vaccines are in development. But the real winners may be the companies that produce the equipment that will be needed to dispense and deploy the vaccine or antiviral treatments to hundreds of millions.
And that’s the argument for investing in the XHE fund. In 2020, the fund has only managed a return of around 7%. But over the last 10 years, the fund has grown over 200%. And with the United States getting closer to a vaccine every day, this is a fund that is looking very strong for the rest of 2020 and into 2021.
Fidelity MSCI Health Care ETF (FHLC)
Expense ratio: 0.08%
Total assets: $1.9 billion
If it’s an election year, it must mean that healthcare is going to be an issue. And right on cue, healthcare is moving into the national psyche. However, for the most part, the issue of universal healthcare has already been decided. It’s really just a question of how to manage the cost of that care.
But right now, the focus is on the development of a Covid-19 vaccine, and the FHLC ETF has some of the leading names in that fight as part of its portfolio, including Johnson & Johnson (NYSE:JNJ), Merck (NYSE:MRK) and Pfizer (NYSE:PFE).
That isn’t going to be an issue that’s going to go away anytime soon. And that’s why the FHLC ETF is a great choice for investors who are looking for healthcare ETFs.
KraneShares MSCI All China Health Care Index ETF (KURE)
Expense ratio: 0.65%
Total assets: $78.4 million
Right now China is a lightning rod issue. However, investing frequently calls for being bold when others are fearful. And that’s a reason to look at the KURE All China Health Care Index. According to Statista, the healthcare service market value in China could reach $2.2 trillion by 2030. It was already up to 8.8 billion by the end of 2017.
And that’s not surprising. China combines the two factors that are causing the healthcare sector to continue its growth in the United States. First they have an aging population and second they put a focus on technology that continues to innovate.
To that end KURE focuses on large-cap Chinese stocks in the healthcare sector. It tracks the MCSI China All Shares Health Care 10/40 Index which is weighted by market capitalization. The fund features both value and growth stocks.
As of Feb. 9, 2020, the ETF’s top three holdings include Jiangsu Hengrui Medicine Co. and Wuxi Biologics and Sino Biopharmaceutical.
Invesco S&P 500 Equal Weight Health Care ETF (RYH)
Expense ratio: 0.4%
Total assets: $697 million
The Invesco Equal Weight ETF focuses on an equal-weight strategy that, as its name implies, gives every stock in a portfolio equal weight, regardless of its size. Equal weight investing can help reduce the risk of having a fund that is weighted towards funds with a particular attribute, such as a high market cap.
And the fund is also diversified in its exposure to healthcare stocks. The fund covers healthcare equipment and supplies; biotechnology; pharmaceuticals; and healthcare technology stocks. This proves that investors are truly spreading their risk. And they’re doing it without sacrificing performance.
The Invesco S&P 500 Equal Weight Health Care ETF (Fund) is based on the S&P 500 Equal Weight Health Care Index. The Fund invests at least 90% of its total assets in common stocks that comprise the Index.
So far in 2020, the RYH is outperforming the broader S&P 500 with a healthy gain of over 13%. In fact, over virtually every meaningful period, this fund has outperformed the S&P 500.
Invesco DWA Healthcare Momentum ETF (PTH)
Expense ratio: 0.6%
Total assets: $428 million
In volatile markets such as the one we are in, momentum investing usually takes center stage. The idea behind momentum investing is to get the greatest gain over a very short period. The idea is simple enough — look for hot stocks that are showing an uptrend over a period of just a few weeks or months.
That’s the premise of the Invesco DWA Healthcare Momentum ETF. According to the stock’s prospectus,
The investment objective of the Invesco DWA Healthcare Momentum ETF is based on the Dorsey Wright Healthcare Technical Leaders Index. The Index is designed to identify companies that are showing relative strength (momentum), and is composed of at least 30 common stocks from the NASDAQ US Benchmark Index.
Momentum funds are not without risk, there’s no denying that.
But at a time when growth stocks are out of fashion, this is a fund that can help investors with a healthy risk appetite shoot for a high total return.
iShares US Medical Devices ETF (IHI)
Expense ratio: 0.43%
Total assets: $6.7 billion
Medical devices have been one of the hardest hit sectors due to the novel coronavirus. As elective surgeries were canceled, there was little need for the devices that are involved in such procedures. As a result, the ETF was down about 29% towards the end of March. That, however, was still good enough to inch ahead of the S&P 500.
With hospitals now open for these procedures, investors who jumped into the fund at that time have been rewarded with a more than 30% gain. And the outlook for the fund will look even better once the threat of the novel coronavirus recedes into our collective memory.
Over the last 10 years, the fund has averaged a healthy 15% return for investors. As of March 31, 2020 the fund’s largest holdings included Abbott Laboratories (NYSE:ABT), Medtronic (NYSE:MDT), and Thermo-Fisher Scientific (NYSE:TMO).
Chris Markoch is a freelance financial copywriter who has been covering the market for over five years. He has been writing for InvestorPlace since 2019. As of this writing, Chris Markoch did not hold a position in any of the aforementioned securities.