Vanguard exchange-traded funds (ETFs) are a low-stress way to grow your capital over time. These funds stand out from the crowd because they are owned by their own investors, not by outside shareholders who may have conflicting interests. This shareholder-friendly business structure allows the company to focus on optimizing the long-term performance of its funds, and the results speak for themselves. Many of Vanguard's ETFs have outperformed their peers, as well as the market averages, over the past 19 years.
Which Vanguard ETFs stand out as top buys right now? If you're looking for a fund that offers strong earnings growth, moderate risk, and an enormous amount of deep value, the Vanguard Health Care Index Fund (VHT 0.03%) should definitely be on your radar. This fund tracks the performance of the U.S. healthcare sector, which is set to benefit from two interrelated trends over the next decade. Keep reading to learn more about this potential hidden gem in the vast ETF universe.
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Eight-trillion reasons this healthcare ETF is a smart buy
Generally speaking, healthcare stocks haven't been a winning play for investors in 2023. The capital-intensive nature of drug development, a seemingly stricter Food and Drug Administration (FDA), the forthcoming Medicare drug-price negotiation headwind, and the highly innovative nature of the space have all weighed on the sector this year. For instance, the normally spry Vanguard Health Care Index Fund (aka VHT) has so far fallen by a little over 5% in 2023.
A decade from now, though, investors will probably look back and realize this moderate downturn was actually a great opportunity to buy this ETF at a hefty discount. The main reason is that U.S. healthcare spending is expected to soar from $4.4 trillion in 2022 to about $8 trillion by 2035, according to a Congressional Budget Office report. This massive growth in U.S. healthcare spending is expected to be driven by two interrelated factors.
One is the aging of the U.S. population, which will increase the overall size of the patient pool and in turn, the demand for healthcare products/services. The other is the ever-rising price of medical products and services in the U.S., which is highly likely to boost revenues/profits across the space. These favorable trends should benefit the majority of companies in the VHT portfolio, which includes drug makers, medical device makers, and healthcare service providers.
Key investing takeaway
The VHT offers a great opportunity to benefit from this powerful growth trend. Many of the fund's top holdings are industry leaders with strong competitive advantages, proven innovation capabilities, and high pricing power due to their global reach. Moreover, most of these healthcare companies have a track record of growing their earnings much faster than revenue on a yearly basis (1.4 times faster on average). As a result, a 55% rise in healthcare spending countrywide would likely translate into an earnings bonanza for many of VHT's largest holdings over this 13-year period.
All things considered, the VHT seems poised to be one of the best performing Vanguard ETFs over the next decade thanks to the confluence of the aging U.S. population, the rising cost of healthcare in the U.S., and the stellar operational efficiency of many of its top holdings. This slumping Vanguard ETF, therefore, screens as a compelling contrarian buy right now.
