A Quick Guide To Healthcare ETFs（ZT）

青影

Healthcare spending has risen to 17% of American GDP, as baby boomers age and technological advances take a bigger bite out of each trip to the doctor, hospital, treatment center or diagnostic clinic. Sector investment and trading opportunities have grown in lockstep, with a bewildering variety of equity and fund choices capturing unique segments of this booming industry. (To learn more, see: Investing In The Healthcare Sector).

It can be difficult to choose the best healthcare exposure without doing your homework so take the time to study the sector in detail before taking on risk. While the majority of segments show stable balance sheets, speculative fervor moves a sizable minority focused on new equipment, technologies, materials or techniques. Biotechnology represents an especially speculative sub-group, adding considerable risk when misunderstood or bought for the wrong reasons. (See: The Ups And Downs Of Biotechnology).

A broad variety of sector ETFs simplify the selection process with clearly segmented exposure to major industry themes. Inverse and leveraged funds add to these opportunities, allowing more aggressive traders and investors to build exposure or take virtual short positions against slow moving, overpopular or overheated subgroups. Fund construction and fee structure should be examined before taking risk because stocks that seem similar can show very different volatility profiles. (For more, read: Healthcare Stocks: A Prescription For Gains?)

Major healthcare ETFs can be broken down into broad coverage, pharmaceuticals, biotechnology, medical devices, providers and services. In addition, a more specialized group of funds has emerged recently that focuses on medical breakthroughs, small caps, genomic revolution, clinical trials, international exposure, and momentum. (For related reading, see: Four ETFs To Play A Booming Healthcare Sector).

Fifteen sector ETFs now trade with an average volume in excess of 100,000 shares per day, allowing multiple choices in many segments, with a heavy concentration in broad healthcare, pharmaceuticals and biotechnology. (See: Pharmaceutical Vs. Biotech Investing: Is It Worth The Risk?). Thinly traded funds align closely with the specialized groups, with many trading between 20,000 and 70,000 shares daily. Spreads and high fees add additional risk to these less-popular instruments.

Broad-based ETFs

Name

Assets (as of 4/15)

Avg Vol

SPDR Health Care Select Sector (XLV)

$13,752,371.20

9,776,559

Vanguard Health Care ETF (VHT)

$5,406,417.60

273,081

First Trust Health Care AlphaDEX Fund (FXH)

$3,573,090.00

323,773

iShares U.S. Healthcare ETF (IYH)

$2,422,523.80

223,324

S&P Equal Weight Health Care ETF (RYH)

$705,060.00

46,900

MSCI Health Care Index ETF (FHLC)

$588,304.00

177,773

SPDR Health Care Select Sector ETF (XLV) offers the most popular play on the broad sector, trading more than 9 million average daily shares. It also holds more than twice the assets of the next largest competitor, Vanguard Health Care ETF (VHT). The smaller fund has a slightly lower expense ratio, at .12% compared to .15% for the larger fund. Both instruments exhibit nearly identical price action over time, with XLV trading just above 50% of VHT’s value.

First Trust Health Care AlphaDEX Fund (FXH) offers an interesting alternative for market players looking for enhanced sector exposure. It is constructed using a growth-based index of Russell 1000 components that excludes many mid and small cap companies. The fund carries a much higher expense ratio than its more generic competitors at .66%. Its also trades in broader ranges that yield bigger profits for long positions in uptrends and bigger losses in downtrends.

Biotechnology

Name

Assets (as of 4/15)

Avg Vol

Nasdaq Biotechnology Index ETF (IBB)

$8,178,187.20

1,802,370

NYSE Arca Biotechnology Index Fund (FBT)

$3,207,105.00

230,400

SPDR S&P Biotech ETF (XBI)

$1,987,288.40

877,751

Market Vectors Biotech ETF (BBH)

$782,912.60

154,122

Dynamic Biotech &Genome (PBE)

$534,567.00

70,006

BioShares Biotechnology Clinical Trials Fund (BBC)

$21,170.60

33,575

BioShares Biotechnology Products Fund (BBP)

$15,740.10

16,844

Genomic Revolution Multi-Sector ETF (ARKG)

$8,157.90

5,305

Broad-based healthcare funds carry a high weighting in pharmaceuticals and biotechnology - often over 60% - but market players can choose pure exposure through biotechnology funds. Pick these products wisely because the industry bifurcates between companies with strong pipelines and steady revenues, and speculative operations that may never sell a commercial product. These differences can impact returns, especially when market algorithms execute capitalization based rotational strategies. (On a related note, read: Buyer Beware In Biotech ETFs).

Nasdaq Biotechnology Index ETF (IBB) and SPDR S&P Biotech ETF (XBI) offer the two most popular plays, with key differences in capitalization and construction. IBB tracks a capitalization-weighted index, with just four companies comprising more than 30% of the total weighting as of April 2015. Meanwhile, XBI tracks an equal-weighted index of more than 100 companies at all capitalization levels. These differences favor XBI in strong markets when speculation is rife, and IBB in conflicted markets when flights to safety dominate intraday themes.

Pharmaceuticals

Name

Assets (as of 4/15)

Avg Vol

PowerShares Dynamic Pharmaceuticals (PJP)

$1,982,436.60

237,871

iShares U.S. Pharmaceuticals ETF (IHE)

$1,202,072.00

62,865

SPDR S&P Pharmaceuticals ETF (XPH)

$1,185,997.20

123,616

Many pharmaceuticals used to fit the biotechnology category but steady earnings, diverse revenue streams and lower R&D costs compared to overall operating expense shifts the categorization, which also reflects maturity and slower growth rates. However, the line between the two categories continues to blur, with many operations fitting elements of both descriptions. (To learn more, read: Top 10 Pharma Stocks For 2015).

PowerShares Dynamic Pharmaceuticals (PJP) tracks a momentum based sector index that filters components based on technical performance, management and value. The 30 holdings are heavily weighted toward blue chips, with Bristol-Myers Squibb (BMY), Amgen (AMGN), Merck (MRK) and Pfizer (PFE) comprising more than 26% of the weighting as of April 2015. Due to its subjective construction, the expertise of the fund managers will greatly affect returns.

Inverse and Leveraged Funds

Name

Assets (as of 4/15)

Avg Vol

Ultra Nasdaq Biotechnology (BIB)

$833,122.50

464,322

Daily Healthcare Bull 3X Shares (CURE)

$383,392.50

132,494

UltraShort Nasdaq Biotechnology (BIS)

$115,996.60

415,378

UltraShort Health Care (RXD)

$3,099.90

7,100

Three liquid funds offer leveraged exposure to the healthcare industry. ProShares Ultra Nasdaq Biotechnology ETF (BIB) tracks 2x long exposure to the Nasdaq Biotechnology Index, resetting performance on a daily basis, and carries a high expense ratio at .95%. Its construction can depress returns, as illustrated between 1 January 2013 and 31 December 2014 when the Nasdaq Biotechnology Index gained 227% while the leveraged fund gained 434% or 20% less than expected.

UltraShort Nasdaq Biotechnology ETF (BIS) flips over the leveraged equation, with an inverse fund that tracks 2x short exposure to the underlying index. It carries a similar expense ratio at .95% and its performance is also reset on a daily basis. This fund fell 86% in the same two-year period, losing 285 points while the direct fund play gained 166 points.

Bottom Line

The healthcare industry offers a wide variety of ETFs but it’s difficult to avoid exposure to pharmaceuticals and biotechnology because these subsectors are heavily weighted in broad-based funds, denying market players easy access to pure play in other segments. In those cases, individual equities may offer better investment and trading opportunities.