The U.S. healthcare industry is monstrous. In 2020, Americans collectively spent a combined $4.1 trillion on healthcare according to information from Insider Intelligence. With 330 million U.S. citizens, this comes out to approximately $12,400 per person. Additionally, thanks to an exponentially growing population, this market is likely not slowing down anytime soon. Analysts expect that the U.S. healthcare industry could grow to as much as $6.2 trillion by 2028. This means that identifying the best healthcare ETFs to buy should be a big focus for investors over the coming years.
Benefits of Healthcare ETFs
An exchange-traded fund (ETF) is a fund that invests in a large portfolio of securities. ETFs are designed to track a particular index, sector, commodity, or asset. The most common example of an ETF is the SPDR S&P 500 ETF. Furthermore, this fund tracks all the companies in the S&P 500. The ETFs listed below all track companies that operate in the healthcare industry.
There are plenty of benefits to investing in ETFs. To start, buying shares in one of the ETFs below will instantly diversify your portfolio. Instead of owning one or two healthcare stocks, you can invest in the entire industry. One way to envision this is to think of a fruit bowl. Instead of buying one whole piece of fruit, you can buy a fruit bowl. With a fruit bowl, you get a few slices of many different types of fruit.
ETFs are also lauded as a more reliable alternative to stock picking. Investing in ETFs reduces the time, stress, and risk of picking stocks yourself. If you prefer to, you can spend hours researching all the different healthcare companies. Or, on the other hand, you can just buy an ETF and get exposure to the entire industry.
Last, ETFs are known for having incredibly low fees. Over time, investing in low-fee funds can greatly enhance your total return.
With that in mind, let’s examine the three best healthcare ETFs to buy. To come up with this list, I selected the three largest ETFs based on total assets under management (AUM). “Assets under management” is the total amount of money that the fund manages for investors. In general, larger funds are likely to be more reliable.
No. 3 Health Care Select Sector SPDR Fund (NYSE: XLV)
Assets Under Management: $38.6 billion
The Health Care Select Sector SPDR Fund is by far the biggest healthcare ETF. In fact, it’s over twice as large as the next biggest fund. This, by itself, qualifies it as one of the best healthcare ETFs to buy. The Health Care Select Sector SPDR Fund seeks to give investors exposure to the overall healthcare industry. It does this by investing in companies that operate in pharmaceuticals, health care equipment, biotechnology and healthcare providers. The bulk (28.4%) of the fund’s holdings are companies that operate in the pharmaceutical space.
This fund’s top holdings are UnitedHealth Group, Johnson & Johnson, Pfizer, AbbVie and Thermo Fisher. It’s down 6% so far YTD but up 63% over the past five years.
No. 2 Vanguard Health Care ETF (NYSE: VHT)
Assets Under Management: $18.8 billion
The Vanguard Health Care ETF tracks a total of 465 different companies. Additionally, Vanguard is very well known for the quality of its ETFs. The fact that this is a Vanguard fund helps make it one of the best healthcare ETFs to buy.
This fund mainly tracks companies that work in pharmaceuticals (28%), healthcare equipment (18%) or biotechnology (16.8%). Additionally, its biggest holdings are Johnson & Johnson, UnitedHealth Group, Pfizer, AbbVie and Eli Lilly. The Vanguard Health Care ETF is down 8% so far YTD but is up 62% over the past five years.
Healthcare ETFs to Buy No. 1 iShares Biotechnology ETF (Nasdaq: IBB)
Assets Under Management: $8.3 billion
The iShares Biotechnology ETF is slightly more targeted than the other two on this list. It tracks companies that operate exclusively in the biotechnology sector. For example, in total, it tracks 372 companies. Its biggest holdings are Vertex Pharmaceuticals, Gilead Sciences, Amgen Inc, Regeneron Pharmaceuticals and Moderna. This fund is down 16% so far this year but is up 20% over the past five years.
On that note, when searching for the best healthcare ETFs to buy there are tons of options. A good strategy is to identify a specific niche that you are interested in investing in. This could be something like a specific branch of medicine, new technology or disease strain. From there, you can research to see if there are any ETFs that track your specific niche.
For example, the ARK Genomic Revolution ETF focuses entirely on companies exploring genomics. It only invests in 48 companies which makes it much more targeted. Compare this to the Health Care Select Sector ETF, which invests in hundreds of companies. This is just one example of an ETF that’s more targeted than the ones on this list.
I hope that you’ve found this list of the three best healthcare ETFs to buy valuable! Please remember that I’m not a financial advisor and am just offering my own research and commentary. As usual, please base all investment decisions on your own due diligence.
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