Healthcare ETFs: to the Rescue or Code Red Emergency?

Healthcare ETFs: to the Rescue or Code Red Emergency?

The state of this key sector depends on where you look.

Reviewed by: Staff
Edited by: Ron Day

The screening tool at neatly filters ETFs in each of the 11 S&P 500 sectors, and the research capabilities don’t end there. 

Click on the healthcare sector, which is the third largest weighting in the S&P 500 at just over 12%, behind the whopping 30% in technology and just slightly behind the nearly 13% allocation to financial services. Yet this vital sector of the U.S. economy occasionally gets overlooked or suffers from having investors fail to see through to its many sub-industries.  

Those industries within the healthcare sector, each of which is segmented in the screening tool, include:

  • Pharmaceuticals
  • Biotechnology
  • Healthcare providers
  • Healthcare equipment
  • Healthcare technology
  • Healthcare equipment and supplies
  • Life sciences tools and services

In other words, there is a lot more diversity within the so-called “healthcare” sector than sectors like energy and utilities. And until ETFs came along, the ability to dissect this part of the economy like a skilled surgeon was not available to this extent back in the days when mutual funds were king. And even the limited specificity offered there was done without the daily look-through into a fund’s holdings that ETFs offer.

The current stock market is as indecisive as I’ve ever seen it. So, what better time to get a “second opinion” on how exploring healthcare at a more cellular level can help identify potential upside in a tough market. Here’s a quick introduction to a few of the 61 ETFs that are classified broadly under healthcare but target specific niches within that sector.

Healthcare ETF Solutions for Investors

The $5.2 billion iShares US Medical Devices ETF (IHI) scans the stock market for companies involved in magnetic resonance imaging equipment, prosthetics, pacemakers, and X-ray machines. IHI holds 54 stocks, but is a capitalization-weighted ETF, with just 10 names filling out 42% of the fund.

Taking a deeper dive, we land on the $62 million Tema Obesity & Cardiometabolic ETF (HRTS) recently changed its name with an obvious eye toward the popularity of weight loss drugs. This is an actively managed ETF that targets stocks that seek solutions to contemporary issues such as diabetes, obesity and diseases of the heart, the leading cause of death worldwide. This is a smaller cap ETF, with a median company size of $6 billion across 42 holdings. The fund emphasizes the barriers to entry in many of these businesses, which it believes will provide a long-term competitive advantage.  

And another smaller fund, the $49 million Global X Telemedicine & Digital Health ETF (EDOC), would fit the bill as a contrarian ETF, given it's down 17% the past year. Telemedicine addresses the efficiency that comes with seeing a doctor online for situations in which advice, not physical examination, is needed. But it also covers stocks involved in streamlining access to medical records, connecting different types of healthcare devices, and other aspects of helping the vital but often inefficient business of making people better.  

They say that if you have your health, you have everything. And in ETF terms, it makes sense for investors to consider the depths of the healthcare sector in designing a portfolio for modern markets.

Rob Isbitts' Wall Street career spans 5 decades and multiple roles, all dedicated to providing clarity to investors by busting classic myths and providing uncommon perspective. He did so as a fiduciary investment advisor, Chief Investment Officer and fund manager for 27 years before selling his practice in 2020. His efforts now focus exclusively on investment research, education and multimedia. He started ETFYourself and SungardenInvestment to provide straightforward commentary and access to his investment intellectual property for portfolio construction, stocks and ETFs. Originally from New Jersey, Rob and his wife Dana have 3 adult children and have lived in Weston, Florida for more than 25 years.