If you are interested in investing in the health care industry, purchasing a health care exchange-traded fund (ETF) is a convenient way to start without the need to analyze individual companies. A health care ETF allows you to invest in a wide range of the industry or focus on specific segments. This provides diversification and reduces risks compared to investing in individual stocks.
The health care sector offers significant growth opportunities. With people living longer, there is a need to combat various diseases such as cancer, heart disease, Alzheimer’s, stroke, and more. U.S. health care spending has been consistently increasing, with per capita spending growing by 4.1 percent from 2023 to 2023, according to Peterson-KFF’s Health System Tracker.
Investing in a health care ETF can be a lucrative way to participate in a resilient sector of the economy. Here are some of the best health care ETFs categorized by sub-sectors. (Data as of Aug. 6, 2024.)
Types of health care ETFs
The health care sector is diverse and can be divided into sub-sectors based on the specific businesses within it. Investing in a health care ETF can provide exposure to various sectors, including:
- Broad health care
- Includes a range of health care sub-sectors, offering broad exposure to the industry.
- Biotechnology
- Focuses on companies specializing in biotechnology and similar drugs, known for their potential for high returns.
- Medical devices
- Centers on providing medical devices, such as implants and other medical equipment.
- Health-care providers
- Includes companies that deliver care directly to individuals.
- Pharmaceuticals
- Comprises companies focused on developing traditional drugs, distinct from biotech companies.
Investors have various options to choose from based on their preferences. For a comprehensive exposure to the health care industry, consider an ETF that covers all health care-related sectors.
Best health care ETFs
1. Best broad health care ETF
Health Care Select Sector SPDR Fund (XLV)
This ETF tracks the Health Care Select Sector index, which includes health care companies in the S&P 500 index. It covers pharmaceuticals, equipment and supplies, health-care providers, biotechnology, and more.
- 5-year returns (annualized): 12.4 percent
- Expense ratio: 0.09 percent
- Dividend yield: 1.5 percent
2. Best biotechnology ETF
iShares Nasdaq Biotechnology ETF (IBB)
This ETF tracks an index of biotechnology and pharmaceutical stocks listed on the NASDAQ stock exchange, with top holdings including Amgen, Gilead Sciences, and Regeneron Pharmaceuticals.
- 5-year returns (annualized): 7.2 percent
- Expense ratio: 0.45 percent
- Dividend yield: 0.27 percent
3. Best medical devices ETF
iShares U.S. Medical Devices ETF (IHI)
This ETF tracks an index of U.S.-listed stocks of medical device companies, including Abbott Laboratories, Medtronic, and Boston Scientific.
- 5-year returns (annualized): 6.4 percent
- Expense ratio: 0.40 percent
- Dividend yield: 0.54 percent
4. Best health-care providers ETF
iShares U.S. Healthcare Providers ETF (IHF)
This fund tracks an index of U.S.-listed providers of health care, including UnitedHealth, CVS Health, and Elevance Health.
- 5-year returns (annualized): 10.5 percent
- Expense ratio: 0.40 percent
- Dividend yield: 0.75 percent
5. Best pharmaceuticals ETF
iShares U.S. Pharmaceuticals ETF (IHE)
This ETF tracks an index of U.S.-listed pharmaceutical companies, including Eli Lilly, Johnson & Johnson, and Pfizer.
- 5-year returns (annualized): 9 percent
- Expense ratio: 0.39 percent
- Dividend yield: 1.47 percent
What to look for in an ETF
When selecting ETFs, consider key factors to ensure you are investing in the right fund. Here are three essential aspects to consider:
- The sub-sector – Different sub-sectors may react differently to industry conditions, so it’s important to understand the types of companies included in the ETF.
- The investment track record – Review the ETF’s performance history to gauge its success compared to the industry.
- The expense ratio – Pay attention to the expense ratio, as it impacts your overall investment costs.
Typically, larger ETFs have lower expense ratios due to their ability to spread costs across more assets. Look for funds with low expense ratios, as this is a key factor in choosing a top-performing ETF.
Leading brokers for ETFs can help you identify high-quality funds with strong long-term performance.
Bottom line
If you are interested in investing in the health care sector, there are several options available based on your preferences. Consider investing in an ETF that aligns with your desired sub-sector. For those unsure of which ETF to choose, a broad health care ETF provides comprehensive exposure to the industry. While extensive knowledge is not necessary for ETF success, some investors opt for diversified index funds, such as those based on the S&P 500 index, and leave investment decisions to professionals.
Editorial Disclaimer: It is recommended that all investors conduct independent research into investment strategies before making decisions. Additionally, past performance of investment products does not guarantee future price appreciation.