If you want to invest in the healthcare industry, buying a healthcare exchange-traded fund (ETF) is an easy way to get started without having to do all the work of analyzing individual companies. With a healthcare ETF, you can buy a broad cross-section of the industry or even break it down into smaller segments. Either way, you can find the group of stocks you want to own. An ETF also provides diversification, reducing your risks compared to buying individual stocks.
Healthcare also offers significant opportunities for growth. Because people are living longer than ever before, medicine has a multitude of diseases to combat, whether cancer, heart disease, Alzheimer’s, stroke or other diseases. And U.S. health care spending has been above trend for decades. According to the Peterson-KFF Health System Tracker, per capita health care spending increased 3.7 percent annually from 2010 to 2019, compared to 3.4 percent growth for the U.S. economy as a whole.
So a healthcare ETF could be an attractive way to invest in a resilient sector of the economy. Of course, the best investments for beginners also offer tons of options for all kinds of investors.
Here are some of the best healthcare ETFs, based on their subsectors. (Data as of April 5, 2024.)
Types of Healthcare ETFs
The healthcare industry is large and can be divided into subsectors depending on the exact types of companies in it. So you have multiple ways to invest in healthcare, and a healthcare ETF can give you exposure to these sectors:
- Broad healthcare – This grouping includes the many types of healthcare subsectors listed below, allowing you to gain broad exposure to the healthcare industry as a whole.
- Biotechnology – This subsector includes companies specializing in biotechnology and similar medicines. It is an exciting field with the potential for explosive returns.
- Medical devices – This subsector focuses on the supply of medical devices, such as implants or other medical equipment.
- Healthcare providers – This subsector includes companies that actually provide care to individuals.
- Pharmaceutical products – This group includes companies that develop traditional medicines, as opposed to biotech companies.
So you have quite a few options to choose from, depending on what exactly you want. But if you want a cross-section of everything related to healthcare, you should look at an ETF labeled broad healthcare.
Best Healthcare ETFs
1. Best Broad Healthcare ETF
Healthcare Select Sector SPDR Fund (XLV)
This ETF tracks the Health Care Select Sector index and includes healthcare companies in the Standard & Poor’s 500 index. The index includes companies in the pharmaceutical, equipment and supplies, healthcare providers, and biotechnology industries.
- 5-year return (annualized): 11.1 percent
- Cost ratio: 0.09 percent
- Dividend yield: 1.5 percent
2. Best Biotech ETF
iShares Nasdaq Biotechnology ETF (IBB)
This fund tracks an index of biotechnology and pharmaceutical stocks listed on the NASDAQ stock exchange, with top positions including Amgen, Gilead Sciences and Moderna.
- 5-year return (annualized): 3.4 percent
- Cost ratio: 0.45 percent
- Dividend yield: 0.3 percent
3. Best Medical Device ETF
iShares US Medical Devices ETF (IHI)
This ETF tracks an index of U.S.-listed stocks of medical device companies, including Abbott Laboratories, Medtronic and Thermo Fisher Scientific.
- 5-year return (annualized): 8.6 percent
- Cost ratio: 0.40 percent
- Dividend yield: 0.5 percent
4. Best Healthcare Providers ETF
iShares US Healthcare Providers ETF (IHF)
This fund tracks an index of US-listed healthcare providers, including UnitedHealth, CVS Health and Elevance Health.
- 5-year return (annualized): 9.6 percent
- Cost ratio: 0.40 percent
- Dividend yield: 0.8 percent
5. Best Pharmaceutical ETF
iShares US Pharmaceutical ETF (IHE)
This ETF tracks an index of US-listed pharmaceutical companies and includes shares of Eli Lilly, Johnson & Johnson and Pfizer.
- 5-year return (annualized): 6.9 percent
- Cost ratio: 0.40 percent
- Dividend yield: 1.3 percent
What to look for with an ETF
When investing in ETFs, it’s helpful to look at some aspects of each ETF so that you actually buy what you intended to buy. Here are three important things to pay attention to:
- The subsector – Each subsector may respond differently to industry conditions. For example, pharmaceutical companies respond differently to certain industry developments than healthcare providers, as both rely on different sources of financing. So you need to know what kind of businesses you want to own.
- The investment track record – You’ll also want to know the ETF’s track record. Has it outperformed the sector, or underperformed during a period of strong growth? The track record can give you an idea of what to expect from the ETF.
- The expense ratio – Also pay attention to the expense ratio, which tells you how much it costs to own the fund annually, as a percentage of your total investment in it.
Finally, it’s worth noting that larger ETFs tend to have lower expense ratios because they can spread the costs of running the fund over more assets. So the cheapest funds can often be the largest funds, and a low expense ratio is an important measure of what makes a top ETF.
The best ETF brokers can help you find attractive funds with strong long-term returns.
In short
If you’re looking for healthcare exposure, you have several options depending on the subsector you want to tie your money to. If you don’t know which one to buy, you can invest in an ETF that focuses on the broad sector and get total exposure. While you don’t necessarily need to know much to be successful with an ETF, some investors stick with broadly diversified index funds, such as those based on the S&P 500 index, and leave the trading and fund selection to the professionals.
Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making any investment decision. In addition, investors are advised that the past performance of investment products does not guarantee future price increases.
