Equity: U.S. Health Care
Since the Supreme Court confirmation of the Affordable Care Act, many investors have been looking to the healthcare sector. It serves as a demographics-driven defensive play with baby
“XLV, VHT and IYH are three established funds that dominate the segment in assets” boomers aging in our “pill-popping” nation and multinational mega-caps that stand to benefit from growth overseas. ETFs in the segment hold a broad array of US pharmaceutical, biotech and health care companies. Of the eight ETFs currently available, XLV, VHT and IYH are the three established, plain-vanilla funds that dominate the segment in total assets.
XLV, VHT and IYH are all cap-weighted and hold mostly the same 10 companies in their top holdings. You can also add newcomer FHLC to that list, as it tracks the same MSCI index as VHT and has attracted a significant asset base since launching in 2013. The concentrated nature of the market means all four funds are also very top heavy in the big pharma names that dominate the industry like Johnson & Johnson, Pfizer and Merck. XLV is the granddaddy here; trading since December 1998, it has amassed over $10B in total assets. It's also third cheapest in the segment.
VHT and FHLC have the widest scope, holding 300+ companies each, stretching across multiple health care subsectors. They are also the two cheapest choices. Meanwhile, IYH provides the most market-like exposure, albeit at a high cost that hasn't come down even as other funds have jockeyed for the position of low-cost leader.
Alternatives include FXH, a popular alpha-seeker that tracks a quant-driven index with a portfolio that skips the big pharma names in its top holdings, similar to PTH. RYH is an equal-weighted version of XLV, while PSCH specifically targets small-cap companies in the sector. (Insight updated 04/21/17)
All Funds (12)
IYH $1.82 B 1817048200 Broad-based
VHT $6.02 B 6019308335.16 Broad, cheap coverage
FHLC $687.14 M 687144120 Broad coverage with lowest fee
XLV $15.66 B 15655021035.706 Dominates in AUM and liquidity
RYH $555.33 M 555327500 Equal-weight
FXH $954.53 M 954532023.564 Alpha-seeking
PSCH $193.19 M 193194750 Small-cap focus
PTH $60.47 M 60472750 high holding costs
BTEC $6.55 M 6549251.1969 N/A
XH $1.64 M 1642832.856 N/A
JHMH $31.99 M 31985525 broad-based health care
HCRF $2.72 M 2718670 N/A
ETF.com Grade as 04/12/17
Equity: U.S. Health Care
ETF.com Efficiency Insight
Following several fee cuts, three funds have emerged as the low-cost leaders in the US healthcare segment: VHT, FHLC and XLV. Of these, VHT sees the best tracking—and therefore the
“VHT's biggest shortfall in Efficiency comes from its lack of transparency” lowest "real world" cost—thanks to Vanguard's 100% rebate of all securities-lending revenue back to the fund. VHT’s biggest shortfall in Efficiency comes from its lack of transparency—like all Vanguard funds, it updates its holdings monthly instead of daily.
All three of the cheapest funds follow plain-vanilla, cap-weighted strategies. A fourth plain-vanilla option, iShares' IYH, launched in the year 2000 and hasn't kept up with the times; its fee is several multiples more than what its competitors charge. Worse, it's tended to lag its index by even more than its fee.
Of the remaining funds, PSCH gets a nod for delivering on its core objectives. It charges less than any other non-vanilla fund, and its position as the sole small-cap fund in the sector gives it a unique competitive advantage. FXH lags behind the rest of the pack in Efficiency, as it's the segment's most expensive option. Investors are paying up for the fund’s rigorous alpha-seeking methodology, but the strategy's high turnover has resulted in significant drag versus the index.
All funds here have large, stable asset bases, so we see no elevated closure risk. (Insight updated 04/21/17)
ETF.com Tradability Insight
The U.S. Healthcare segment has a multitude of highly liquid funds that attract huge daily volumes. XLV is in a class of its own and the outright winner within the segment when it comes to
“XLV is in a class of its own within the segment when it comes to Tradability.” Tradability. The fund’s average spreads are just a penny, and XLV dwarfs its competitors in median traded volume. It’s the obvious choice for institutions and traders most concerned about liquidity.
VHT, IYH and FXH also score well here. While not on the same level as XLV, all three should pose no issues for the average investor not trading huge lots frequently. Underlying liquidity in these funds is also deep, so block trading through a liquidity provider should be relatively easy and cost efficient. Still, spreads are wide enough to make limit orders important. RYH and FHLC also have ample liquidity, but wider spreads.
PSCH and PTH lag somewhat in Tradability, so investors should use caution when trading these funds. Both funds see robust, if modest liquidity, but wider spreads will increase the costs of working with these two funds.
All funds in the segment see great block liquidity, so block trading should be relatively cheap and easy through a liquidity provider. (Insight updated 04/21/17)
ETF.com Fit Insight
One of the overriding challenges facing health care ETFs in Fit is the industry’s lopsided concentration in a handful of mega-cap pharmaceutical companies (just three make up more
“VHT and FHLC stretch across multiple out-of-sector industries, including insurers” than half the total market-cap). Four funds—FHLC, IYH, VHT and XLV compete for best-in-class Fit score. For the most part, all four track broad, market-cap-weighted indices and have weighted average market caps very close to our neutral benchmark, with similar tilts in sector, size splits and volatility.
VHT and FHLC track similar MSCI indices and hold the broadest portfolios in the segment, with over 300 names each. They stretch across multiple out-of-sector industries, including insurers, making them perhaps more diversified than investors may want. Segment giant XLV is also cap weighted, but its limited selection universe (the S&P 500) means it only holds a few dozen companies and has a large-cap tilt. Still, in an industry so heavily weighted in mega-caps, XLV scores exceptionally well in Fit.
The remaining four funds don't Fit the neutral market as closely due to their alternative indexing strategies. They're different enough to warrant an in-depth look, not a default allocation. RYH is an equal-weighted version of XLV and has significant holdings-overlap with the benchmark, but its weighting scheme tilts it towards midcaps. PSCH scores low in Fit by design—it’s a small-cap fund being measured against an industry dominated by mega-cap pharma. PSCH tilts extremely small compared to our neutral benchmark. (Insight updated 04/21/17)