The 5 Top Healthcare ETFs

The healthcare industry has seen immense changes in recent years, as the wholesale reform of the way the U.S. government participates in helping Americans get healthcare coverage occurred early in the Obama administration and is now getting revisited by the Trump administration. Healthcare stocks have adapted well to the changes, producing solid returns and participating fully in the bull market in the market over the past eight years. If you want simple exposure to healthcare stocks, exchange-traded funds can give you an easy way to add healthcare to your overall portfolio. The largest healthcare ETFs have a lot in common, but they also have some subtle differences that make them worth a closer look.

Data source: Fund providers.

To specialize or not to specialize

The primary question that healthcare investors have to ask when looking at ETFs in the space is whether they want the broadest possible exposure to the industry. All-purpose healthcare ETFs include a wide variety of different subsectors within healthcare. For instance, the leader in the space, Health Care Select SPDR, has about a third of its assets in pharmaceutical stocks and roughly 20% each in biotech, healthcare providers, and healthcare equipment and supplies. A small allocation to life sciences tools and other technology rounds out the portfolio. Among the fund's top five holdings, only one is primarily involved in biotechnology.

The Vanguard healthcare ETF has very similar allocations across subsectors like pharma, biotech, and equipment. Across general healthcare stocks, the ETF calls out managed healthcare companies with an 11% allocation, and healthcare services providers, distributors, facilities providers, and supplies manufacturers bring the total for to slightly more than 20%. Vanguard's cost advantage gives it a slight performance lead over its peers in the space.

The iShares ETF has the highest expense ratio of the three general funds, but it doesn't particularly distinguish itself from its peers in any other way. The benchmark indices in the healthcare space follow relatively similar methodologies, and weightings in particular subsectors tend to be within a few percentage points of each other.

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Focusing on biotech

Biotechnology has provided lightning-fast growth in recent years, and some growth-oriented investors have therefore sought to focus solely on biotech stocks to avoid the more lackluster gains from medical devices, healthcare facilities, and traditional pharma. Here, though, the two main ETFs have very different approaches.

The iShares biotech ETF uses a market-cap weighted methodology that emphasizes the biggest names in the biotechnology industry. The top five holdings account for 40% of the iShares ETF's assets, and included among the stocks it owns are some general pharmaceutical stocks that have a substantial presence in the biotechnology field. The ETF has positions in more than 160 stocks overall.

The SPDR biotech ETF takes a different approach. All 100 of its stocks are pure biotech plays, and the fund uses a modified equal-weighted selection process that offers exposure to large, mid-sized, and small companies in the biotechnology space. In fact, four of the five top holdings are in companies that most would consider mid-cap stocks, with only one megacap industry powerhouse among the top 10.

Which healthcare ETF is best for you?

Deciding which healthcare ETF best fits your needs depends on what you're looking for from the space. General healthcare ETFs have the advantage of giving you exposure to every corner of the sector, but biotech ETFs let you drill down on what many see as the best growth opportunities in the industry. Although all the general healthcare ETF look very much alike, the two different ways that the biotech ETFs approach the space make it easier to choose between them depending on your own particular preferences.