Morningstar fund analyst Robert Goldsborough said diversified health-care ETFs are a more diversified way to gain exposure to drug companies. The Health Care SPDR (XLV), which has near-$10 billion in assets, has drug companies Johnson & Johnson, Pfizer and Merck among its top holdings, along with insurance plan providers, like UnitedHealth. Goldsborough also highlighted the Vanguard Health Care ETF (VHT), which also has big drug company holdings.
These funds are inexpensive and cover every part of the health-care sector, too, including biotech, he said. XLV has an expense ratio of 0.16 percent; Vanguard's VHT has an expense ratio of 0.14 percent. Returns for these ETFs are not as strong as for the more concentrated bets—not surprising, given the greater diversification across health-care stocks. XLV is up 9 percent year-to-date and 24 percent in the past one-year period, while VHT has slightly outperformed its peers in the past year with a return of 26 percent—at a slightly lower management fee.
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For a more concentrated health-care bet, Goldsborough likes biotech ETFs.
"There's lots of growth and mergers and acquisitions in this niche," he said. IShares Nasdaq Biotechnology Index ETF (IBB), which has more than $5 billion in assets, is worth considering, he said. It owns big biotech stocks, including Amgen and Biogen Idec, but "smaller upstarts sit shoulder-to-shoulder with big companies in this ETF," Goldborough explained.
SPDR S&P Biotech ETF (XBI) is a similar ETF.
IBB has an expense ratio of 0.48 percent; the SPDR biotech ETF has an expense ratio of 0.35 percent. IBB is up 10 percent year-to-date and 42 percent over the past one year, matching returns of the pharmaceutical ETFs. XBI has been the winner in recent history, up near-18 percent this year and 44 percent in 2013—at its lower expense ratio of 35 basis points.
Biotechnology stocks have been hit hard in the past three months, "but there's a bright future for biotech, since the world needs innovative therapies," Goldsborough said, adding that he sees the biotech setback as only temporary.