If you're looking for the best healthcare funds, 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 all the available mutual funds 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.
- The health care sector tends to perform better than other sectors during market downturns.
- Advancements in health and medical technology make health care stocks attractive for growth strategies.
- As the average life span continues to increase, health care needs will continue to increase, causing more growth and stability for investors.
What Is the Health Sector?
The healthcare sector, also known as health or specialty-health, is a stock sector that focuses on the healthcare industry, which is quite broad and diverse. 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 defensive stocks because they tend to perform well (or have lesser declines) in a bear market. Even amid a recession, when consumer spending is down, they still need basic health products and services, such as medication, doctor visits, pharmaceutical drugs, and emergency care.
7 Best Healthcare Funds
There are dozens of mutual funds and ETFs that specialize in health stocks, but there are only a handful that combine no loads, low expense ratios, and solid long-term performance. In no particular order, here are the best healthcare funds available.
The average lifespan in the U.S. is 75 years for men and 80 years for women, so people generally spend on healthcare for 30 years or more.
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. VGHCX could be a top performer over the next decade or more, benefiting from an aging population and advances in biotechnology and medical devices. Expenses are just 0.32%, and the minimum initial purchase is $3,000.
Fidelity Select Health Care (FSPHX)
Fidelity invests in a diverse blend of stocks within the broad healthcare sector, including sub-sectors like pharmaceuticals, biotechnology, 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%, and the minimum initial purchase is $0.
Fidelity Select Medical and Equipment Systems (FSMEX)
FSMEX invests in companies developing and manufacturing medical devices and other related businesses. The expanding older population of the U.S. and world have 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%, and the minimum initial investment is $0.
Fidelity Select Bio-Technology (FBIOX)
This mutual fund invests in the fast-growing biotechnology sub-sector of health care. 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%, and the minimum initial purchase is $0.
Biotech follows trends that many new technology stocks follow as investors move between new investments. Prices tend to rise and fall quickly in biotech.
Vanguard Health Care ETF (VHT)
Vanguard's ETF 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%.
Health Care SPDR ETF (XLV)
This stock focuses on 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. Health stocks are considered defensive because 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%.
iShares Nasdaq Biotechnology ETF (IBB)
BlackRock's iShares 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% expense ratio is slightly 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% and 10% 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.
The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.