Yahoo Finance 4 Health Care Investments to Boost Your Portfolio
The Affordable Care Act brought approximately 11.7 million people health insurance during open enrollment for 2015, and the health care business is booming. It's no surprise that health care stocks are also surging this year, with the S&P 500 Health Care index up 10.89 percent through June 26 versus a 2.07 percent increase in the Standard & Poor's 500 index.
Investors are pouring money into health-related exchange-traded funds. In the first five months of 2015, the health care sector was the best performer and the most popular with $6.7 billion inflows into related ETFs, says Todd Rosenbluth, director of ETF research at S&P Capital IQ, a New York-based financial information provider. Health care captures the largest share of investor dollars flowing into the 10 S&P 500 sectors, many of which have seen outflows, including consumer staples, utilities and industrials, Rosenbluth says.
Traditionally, the health care sector is a defensive part of the stock market, a place where investors can shift money during times of uncertainty or even down markets. After all, even when times are tough, people still need to go to the doctor. "The health care sector is a good place to go where you are unsure about the direction of the market. Many companies pay dividends and tend to be relatively stable," Rosenbluth says.
But now the health care sector has taken on a new tone and has seen stronger demand over the past year as more Americans have acquired health insurance.
"The advent of Obama care -- the Affordable Care Act -- has added lots of people to health care insurance rolls. Now that millions of people have insurance coverage, it is assumed that they will use it and buy services and drugs," says Kim Caughey Forrest, vice president at Fort Pitt Capital Group, a fee-only investment management firm in Pittsburgh.
Another factor driving health care stocks higher is demographics -- specifically, the aging of the U.S. population. "Every day, more than 10,000 people are turning 65 in the U.S., a trend that will continue for the next decade," says David Yepez, investment analyst at Exencial Wealth Advisors, a registered investment advisor in Oklahoma City.
Investors looking to capitalize on these trends have many choices. The health care sector covers a wide range of industries, including pharmaceutical companies, biotechnology companies, managed care companies, hospital management firms and medical equipment makers.
The biotech sector is a riskier area within the health care sector, as many biotech companies are research and development companies with little or no revenue. "They are doing fantastic things in the realm of science but they are not companies that I think of when I look for a place to put my investing dollars," Caughey Forrest says. "They are designing new therapies that will likely get marketed by the large pharmaceutical companies that have ready-made sales and distribution organizations. I have no doubt that some of the biotechs are going to succeed wildly. It's just unclear which ones these may be."
Here are four health care investments favored by experts:
Health Care Select Sector SPDR ETF (XLV). This ETF, which invests in a basket of securities and trades on an exchange like a stock, includes large-cap stocks across multiple industries in the health care sector and has $14.5 billion in assets. Johnson & Johnson is the fund's top holding at nearly 10 percent. "Something like XLV gives you exposure to multiple industries within health care. There are benefits of getting an industry-diverse ETF instead of just being in the biotech sector or pharmaceutical sectors. Stocks inside this ETF that we like include Johnson & Johnson, Gilead Sciences Inc. and UnitedHealth Group Incorporated," Rosenbluth says. The fund charges 0.15 percent in annual expenses.
Vanguard Health Care Fund (VGHAX). This is an actively managed mutual fund with $52.6 billion in total assets and a low expense ratio for a mutual fund at 0.29 percent. Its largest holding is Bristol-Myers Squibb Company. "This is the largest health care mutual fund. It is very solid, well-managed fund with a strong track record," says Robert Goldsborough, a fund analyst at Chicago-based Morningstar, an investment research firm.
CVS Health Corp. (CVS). This Woonsocket, Rhode Island-headquartered company provides pharmacy and health care services throughout the U.S. Through the end of 2014, it operated 7,822 retail drugstores and 860 health care clinics. The stock recently traded at $105.84 and has a 52-week trading range of $74.69 to $106.68. "CVS Health has a differentiated set of assets in the health care sector. This company has an unmatched retail scale, great management team and good corporate strategy, positioning this company ahead of the competitors," Yepez says.
iShares NASDAQ Biotechnology ETF (IBB). This ETF is comprised of primarily large-cap biotech stocks and has $8.8 billion in assets. It had approximately $450 million of inflows during the first five months of 2015, according to S&P Capital IQ, and it's among the more concentrated industry ETFs, with its top 10 holdings recently representing 57 percent of assets. However, all of these stocks are ranked by S&P Capital IQ as "buys" or "strong buys," including Amgen Inc. and Gilead Sciences Inc. "We like this ETF even though it is focused on a riskier industry. By holding the largest of the biotech companies, you reduce the risk profile because they are more established and stable," Rosenbluth says. The ETF charges 0.48 percent in annual fees.
For investors looking to boost portfolio returns, longer-term demographics and the traditional defensive nature of the sector create an attractive opportunity. "Traditional health care names are still pretty fairly valued. It is a good place to be for the long term," Goldsborough says.
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