The Top 3 ETFs for Healthcare Investing

Check out this link for a Yahoo! Finance ETF Screener with a list of all 42 healthcare ETFs which are sorted from highest to lowest net assets under management [AUM]. The top three HealthShares ETFs by net assets under management [AUM] include Diagnostics (HHD), Cancer (HHK), and Enabling Technologies (HHV) with AUM of $26.2 million [M], $9.7M, and $6.5M, respectively, versus an average of $171M for the overall health ETF category.

However, the distribution of AUM among the 42 healthcare ETFs is uneven, including half (21) of the funds attracting less than $10 million AUM and 15 funds attracting over $50 million AUM. As illustrated in the one year chart, the top three HealthShares ETFs have outperformed both the Healthcare Sector SPDR (XLV) and the S&P 500 Index by a wide margin over the past year.

The top holdings at over 7% of net assets in each of these HealthShares ETFs are as follows:

• HHD: Myriad Genetics (MYGN) (7.1%)
• HHK: APP Pharma (APPX) (7.9%) & Vertex (VRTX) (7.9%),
• HHV: Illumina (ILMN) (13%) and Quest Diagnostics (DGX) (9%)

Each of these three ETFs holds a total of 22 globally-diversified stocks and there are no extreme over-weighted positions, as only Illumina breaks the double-digit threshold at 13% of HHV -- largely due to a one-year stock increase of 120% due to strong sales growth results for the Company’s genetic analysis systems. Illumina is dominating its smaller rival Affymetrix (AFFX), which missed estimates and reduced its outlook after the close on Thursday, cratering the stock by 15% in after-hours action.

Since these funds avoid both extremes of the market cap spectrum, the component companies are likely to participate in ongoing consolidation of the healthcare sector – such as GE Healthcare’s $860 million purchase of specialty medical equipment maker Vital Signs (VITL) on Thursday in addition to recent biotech M&A. The annual holdings turnover varies wildly among the three funds, with HHK leading the way at 50%, followed by HHD at 35%, and HHV at 18% -- as compared to just 10% for the $2.2 billion AUM Healthcare Sector SPDR (XLV), 19% for iShares Nasdaq Biotech (IBB), and 45% for PowerShares Dynamic Pharma (PJP).

HHD, HHK, and HHV represent my top picks among HealthShares' current offerings and I believe buying all three of these ETFs is a better strategy than simply purchasing XLV, as many investors prefer for a simple way to achieve healthcare sector investment exposure. If these three funds continue to outperform the overall healthcare sector (as measured by XLV), I believe they will attract both the attention and the assets of many more investors over the coming months and years.

Disclosure: none