The 7 Best Health Care Funds to Buy

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If you're looking for the best healthcare funds to buy, you'll likely find them among a handful of low-cost mutual funds and ETFs. If you do it the right way, investing in sector funds can be a smart way to boost long-term returns while minimizing risk through diversification.

Narrowing down the all the available mutual fund and ETFs that invest in health stocks to a small list can be challenging but if you know the best qualities to look for, choosing the best healthcare fund can be relatively easy. With our list of top health sector funds, we did most of the work for you.

What Is the Health Sector? 

The healthcare sector, also known as health or specialty-health, is a stock investing sector that focuses on the healthcare industry, which is quite broad and diverse with sub-sectors included within it. Some of the specific areas or sub-sectors within the health industry include hospital conglomerates, institutional services, insurance companies, pharmaceutical drug manufacturers, biotechnology companies, and manufacturers of medical devices.

Why Invest in Health Sector Funds?

Investors choose health sector funds for two primary reasons: growth and diversification. Along with the technology sector, the health sector is one of the fastest growing industrial sectors. With an aging population in the U.S. and advances in medical technology, health care can be a leading growth sector for years or decades to come.

The baby boom generation, born between 1946 and 1964 is the largest segment of the U.S. population. Now in their 50's, 60's and 70's, baby boomers are the greatest consumers of health products and services.

As for diversification, health stocks are considered to be defensive stocks because they tend to perform well (or have lesser declines) in a bear market. Even in the midst of a recession, consumers still need basic health products and services, such as medication, doctor visits, pharmaceutical drugs, and emergency care.

7 Best Healthcare Funds to Buy

There are dozens of mutual funds and ETFs that specialize in health stocks, but there are only a handful that has a combination of no loads, low expense ratios, and solid long-term performance. In no particular order, here are the best healthcare funds to buy:

  1. Vanguard Health Care (VGHCX): Vanguard only offers a few mutual funds that invest in sectors and VGHCX is one of the best and oldest on the market. Focusing on healthcare stocks, such as Bristol-Myers Squibb (BMY) and UnitedHealth Group (UNH), VGHCX is one of the best performing funds over the past 20 years. Benefiting from an aging population and advances in biotechnology and medical devices, VGHCX could be a top performer over the next decade or more. Expenses are just 0.32 percent, and the minimum initial purchase is $3,000.
  2. Fidelity Select Health Care (FSPHX) invests in a diverse blend of stocks within the broad healthcare sector, which includes sub-sectors like pharmaceuticals, biotechnology, and medical devices and equipment. So if you want to add health stocks to your portfolio and make a broad, long-term bet on the growth of the health sector, FSPHX is a smart choice for you. The expense ratio for FSPHX is 0.7 percent, and the minimum initial purchase is $0.
  3. Fidelity Select Bio-Technology (FBIOX): This mutual fund invests in the fast-growing biotechnology sub-sector of health care. Although biotech stocks have the potential for great appreciation, they can also have short periods of steep declines. Therefore FBIOX can be considered an aggressive stock fund, which means it's appropriate for long-term investors who don't mind the ups and downs of such investments. The expense ratio for FBIOX is 0.72 percent, and the minimum initial purchase is $0.
  4. Fidelity Select Medical and Equipment Systems (FSMEX) invests in companies that develop and manufacture medical devices and other related businesses. An aging population in the U.S. and around the world has created unprecedented demand for medical equipment and services, and this trend is likely to continue for the foreseeable future. FSMEX is one of the highest rated sector funds at Fidelity with a record of market-beating long-term returns. The expense ratio is 0.71 percent, and the minimum initial investment is $0.
  5. Vanguard Health Care ETF (VHT) is a smart choice for cost-conscious investors who prefer an ETF version to Vanguard's VGHCX. One of the most diversified health stock ETFs, VHT tracks the performance of the MSCI U.S. Investable Market Health Care 25/50 Index, which offers investors exposure to 430 stocks in the health sector. Expenses are just 0.10 percent.
  6. Health Care SPDR ETF (XLV) focuses on included pharmaceutical companies, biotechnology firms, medical device manufacturers, hospital corporations, and more. With an aging population and advances in medicine, the health sector is poised to be a top performing sector for the foreseeable future. The reason health stocks are considered to be defensive is that they tend to hold their value better than the broad market during major declines. People still need their medication and to visit the doctor in recessions. The expense ratio for XLV is 0.13 percent.
  7. iShares Nasdaq Biotechnology ETF (IBB) may be the best ETF to buy for biotechnology stocks. The fund tracks the NASDAQ Biotechnology Index, which consists primarily of large-cap biotech stocks like Gilead Sciences and Amgen. The 0.46 percent expense ratio is a bit on the high side for an ETF but still a good value for a diversified stock fund with good long-term growth potential.

When investing in sector funds, it's wise to remember to limit exposure to smaller allocation weights in your portfolio. A good range for most investors is between 5 percent and 10 percent of the entire portfolio. Health stocks are generally good diversification tools but remember that some of the sub-sectors, such as biotechnology can have significant volatility in the short term.

Disclaimer: The information on this site is provided for discussion purposes only, and should not be misconstrued as investment advice. Under no circumstances does this information represent a recommendation to buy or sell securities. Kent Thune does not personally hold any of the above securities as of this writing, but he does hold XLV and VGHCX in some client accounts.