Healthcare ETFs: Why Have Investors Avoided Them Like the Plague?

Few ETFs have been as sickly as the Vanguard Health Care Fund (VHT). It has negative performance returns for 1 week, 1 month, 3 months, 6 months and 1 year. (Pass the Ibuprofen!)

Granted, an 11% loss over one year pales in comparison to 28% losses in many financial services ETFs. Yet some believe that financials present "once-in-a-lifetime" opportunities going forward. In contrast, I simply haven't heard the same upbeat chatter with regard to healthcare investing.

It was a different story 4 1/2 years ago. I recall participating in a live radio broadcast at the "Investing in Yourself" Conference in Costa Mesa, California. Specifically, a respected speaker on the panel expressed that a long-term investor could "not go wrong with healthcare due to incredible spending on the aging boomers."

True, Vanguard Health Care Fund has gained ground. Yet it hasn't been as strong as defensive sectors like Utilities (XLU), Consumer Staples (XLP), or even as reasonable as Vanguard's Total Market Index Fund (VTI).

What's ailing the healthcare segment? Some have suggested that investors are wary of the political arena and the eventual probability that the government will ultimately nationalize the health system.

Pharmaceutical companies have been the biggest laggards. And perhaps with good reason. They have to contend with lengthy FDA approval, scores of competitors, the threat of litigation... not to mention the push towards socialized medical delivery.

Perhaps the lesson for investors, however, is the need to target more specialized areas. In previous columns, I've discussed the soaring profitability of medical device makers, regardless of political trends. That makes the iShares Medial Devices Fund (IHI) a better long-term hold than Vanguard Health Care.

Another investment that is likely to win as baby boomers age? Nursing home operators. Granted, so many of these facilities failed in the 90s due to scandals and lawsuits. Nevertheless, the surviving providers have growth stronger and corresponding healthcare REITS are going to throw off predictable revenue streams for decades.

There are ETFs for residential, industrial and mortgage REITs. In contrast, there isn't an exchange-traded fund for health care REITs... not yet.

That said, individual REITs exhibit many of the same aspects of exchange-traded funds already, including favorable tax treatment, diversification across companies, and intra-day trading.

For instance, Health Care REIT (HCN) invests in healthcare and senior housing facilities across the United States. They are diversified across 195 assisted living facilities, 203 skilled nursing facilities and 31 independent living care retirement communities.

Disclosure Statement: ETF Expert is a web log ("blog") that makes the world of ETFs easier to understand. Pacific Park Financial, Inc., a Registered Investment Advisor with the SEC, may hold positions in the ETFs, mutual funds and/or index funds mentioned above. Investors who are interested in money management services may visit the Pacific Park Financial, Inc. web site.

Comments

[bearfund:]

I don't think it's safe to assume that any investment is safe from politicians. They could easily fix prices of medical devices at unprofitable levels or harm REITs by forcing nursing homes into bankruptcy or nationalizing them outright and either confiscating the underlying land and buildings or paying below market lease rates on them. Fear the AARP and the politicians in its pocket. True of other industries, too? Absolutely, especially domestic oil and gas. But the focus on health care is intense and the lobbies behind that focus are vast and powerful and, unlike energy, most of the market is domestic and subject to total manipulation. This is a very high risk area to invest in, no matter how you play it.

2008 May 11 01:41 PM

[Random Walk:]

100% agree with bearfund. But I still think many investors are holding out and seeing what the new administration in 2009 will do. If people realize, just as they realized back in 1993, that universal healthcare requires raising taxes, any meaningful healthcare reform package will fail.

2008 May 12 01:43 PM

[BAWE:]

Maybe the problem is Vanguard.

2008 May 12 09:29 PM

[smokey888:]

You have to be a broker or ......

2008 May 13 02:05 AM