What Is a Healthcare ETF? Everything You Need to Know

Healthcare ETFs offer investors a combination of reasonable valuations and defensive qualities in 2024.

In a year where only a handful of mega-cap tech stocks are driving the market to multiple all-time highs, investors are increasingly looking at defensive sectors, such as healthcare, for reasonable valuations and long-term growth potential.

Investing in a healthcare ETF can be an effective way for investors to gain exposure to the healthcare industry without having to purchase individual healthcare stocks. This can help to reduce risk and provide diversification across different subsectors of the growing healthcare industry. 

What Is a Healthcare ETF? 

A healthcare ETF is an exchange-traded fund that invests in a diversified portfolio of healthcare companies, such as pharmaceutical, biotechnology, medical devices and healthcare service providers. The objective of a healthcare ETF is to provide exposure to the healthcare industry's performance and offer investors a way to invest in a diversified basket of healthcare stocks. 

There are a range of reasons investors choose healthcare ETFs, including diversification, defensive investing and potential for long-term growth through continuous innovation, such as new drug development and genomics.

Examples of Top Healthcare Stocks 2024

Here are some of the top performing healthcare stocks year-to-date based on share price increase as of July 5th:

• Eli Lilly and Co. (LLY): Up 57% this year, LLY is a pharmaceutical giant that produces a wide range of drugs, including insulin, cancer treatments and weight loss drugs.
• Regeneron Pharmaceuticals, Inc. (REGN): Up 19% this year, REGN develops treatments for eye diseases, cancer, and inflammatory conditions.
• Boston Scientific Corp. (BSX): Up 32% this year, BSX is a medical device company that makes products for heart, vascular, and urology procedures.
• DaVita Inc (DVA): Up 31% this year, DVA is a leading kidney dialysis provider in the U.S.

Here are some other large, well-established healthcare stocks that many analysts believe to be good investments:

• Johnson & Johnson (JNJ): A diversified healthcare company with a presence in pharmaceuticals, medical devices and consumer health products.
• Pfizer Inc. (PFE): A major pharmaceutical company that develops and manufactures prescription drugs and vaccines.
• Abbott Laboratories (ABT): A diversified healthcare company with a presence in pharmaceuticals, medical devices, diagnostics and nutrition. 

Types of Healthcare ETFs With Examples 

Here are the most common types of healthcare ETFs with examples of top funds: 

• Broad healthcare ETFs: These ETFs invest in a broad range of healthcare companies across different subsectors, including pharmaceuticals, biotechnology, medical devices, healthcare services and more. Examples of broad healthcare ETFs include the Health Care Select Sector SPDR Fund (XLV), the iShares Global Healthcare ETF (IXJ) and the Vanguard Health Care ETF (VHT). 
• Pharmaceutical ETFs: These ETFs invest in companies that research, develop, manufacture and market pharmaceutical products. Examples of pharmaceutical ETFs include the iShares U.S. Pharmaceuticals ETF (IHE) and the Invesco Dynamic Pharmaceuticals ETF (PJP). 
• Biotechnology ETFs: These ETFs invest in companies that research, develop, and market biotechnology products. Examples of biotechnology ETFs include the iShares Nasdaq Biotechnology ETF (IBB) and the SPDR S&P Biotech ETF (XBI). 
• Medical devices ETFs: These ETFs invest in companies that manufacture and distribute medical devices, including surgical equipment, diagnostic devices and medical imaging equipment. Examples of medical devices ETFs include the iShares U.S. Medical Devices ETF (IHI) and the Invesco Dynamic Medical & Biotech ETF (PBE). 
• Healthcare services ETFs: These ETFs invest in companies that provide healthcare services, including hospitals, clinics, nursing homes and managed care providers. Examples of healthcare services ETFs include the iShares U.S. Healthcare Providers ETF (IHF) and the Invesco S&P 500 Equal Weight Health Care ETF (RYH). 
• Genomics ETFs: By investing in a genomics ETF, investors can gain exposure to the rapidly growing innovative technologies of gene editing and gene therapy. The largest genomics ETF is ARK Genomic Revolution ETF (ARKG).
• Weight loss drug ETFs: These ETFs started launching in 2023 and offer exposure to the potential of the new and popular weight-loss medications, particularly GLP-1 drugs like Ozempic. Unlike broad healthcare ETFs, weight-loss drug ETFs concentrate on companies involved in this specific segment of the pharmaceutical industry. The largest weight loss ETF is the Tema Obesity & Cardiometabolic ETF (HRTS) with assets of nearly $80 million.

Top Healthcare ETFs by AUM

Data as of July 5, 2024.

Benefits and Risks of Investing in Healthcare ETFs 

Investing in healthcare ETFs can provide several benefits, but it also involves risks. Here are some potential benefits and risks to consider: 

Benefits

• Diversification: Health sector ETFs invest in a diversified portfolio of healthcare companies, which can help reduce the risk associated with investing in individual healthcare stocks. 
• Exposure to a growing industry: The healthcare industry is expected to grow significantly in the coming years, driven by an aging population and increasing demand for healthcare services. Investing in the healthcare sector can provide exposure to this growth potential. 
• Access to different subsectors: Health sector ETFs typically invest in various subsectors of the healthcare industry, such as pharmaceuticals, biotechnology, medical devices and healthcare services. This provides investors with exposure to different segments of the industry. 
• Lower fees: Healthcare ETFs typically have lower fees compared to actively managed healthcare funds, making them a more cost-effective way to invest in the healthcare industry. 

Risks

• Market risk: Like any other investment, healthcare ETFs are subject to market risk, which means that their value can fluctuate depending on market conditions. 
• Concentration risk: Some health sector ETFs may have a higher concentration of holdings in certain subsectors or companies, which can increase their exposure to risks associated with those subsectors or companies. 
• Regulatory risk: The healthcare industry is heavily regulated, and changes in regulations can have a significant impact on healthcare companies and their stock prices. Therefore, this regulatory risk can also affect the price of healthcare ETFs. 
• Company-specific risk: Even though healthcare ETFs provide diversification, they can still be exposed to company-specific risks, such as product recalls, litigation or regulatory issues. 

2024 Outlook for Healthcare Stocks

While healthcare stocks have underperformed the broader market in 2024, the health sector shows promise for investors as large asset managers like BlackRock and Fidelity see a combination of attractive valuations, defensive qualities and growth potential. As we look forward to 2024, we see a favorable risk-reward environment for the sector. 

Industry profit pools are expected to recover in 2024 after facing pressure in 2023 due to inflation and labor shortages. This is driven by cost-cutting measures, rising reimbursement rates, and growth in certain segments like Medicare Advantage. Advancements in areas like AI, robotics and digital health are expected to continue, leading to improved efficiency, diagnostics and treatment options.

For investors wanting exposure to the health sector, healthcare ETFs can provide a combination of diversification and long-term growth potential. However, it's important to understand the benefits and risks of investing in healthcare stocks, and it’s important for investors to consider their investment objectives, risk tolerance and investment time horizon before making any investment decisions to buy shares of these funds.