What Are They?
- Sector ETFs come in four levels of granularity: (1) global, (2) US or international, (3) the main industry sub-groups that comprise the sector, and (4) narrow groups of companies within the sector.
- Healthcare is well covered by ETFs. Barclays offers global, broad US sector, and main industry group ETFs as part of its iShares family. StateStreet offers a broad US sector ETF and ETFs covering the main industry groups. HealthShares offers ETFs containing 22-25 stocks covering specific therapeutic areas and healthcare business activities.
- Leveraged, inverse, quant strategy and equal weighted ETFs are also available for healthcare. They usually use the index for the primary US sector index.
- Most of these ETFs are market cap weighted, meaning that larger companies represent more of the ETF than smaller companies. However, the HealthShares ETFs are equal weighted: each underlying stock represents no less than 2.5% and no more than 15% of the ETF. If a stock rises above 15%, its weighting is cut to 10%.
Why & How To Use Them
- The healthcare sector has grown faster than the overall US economy, and is projected to continue growing faster as the population ages.
- You can overweight a sector by assembling a diversified portfolio of broad ETFs (such as a total US market ETF, foreign stock ETF and broad bond ETF), and then adding one or more of the ETFs on this page to increase exposure to this sector.
- The HealthShares ETFs can also be used by individuals to hedge healthcare costs. For example, a 30 year old diabetic who expects to be treated for the next 50 years may want to own the HealthShares Metabolic-Endocrine Disorders ETF (HHM), so that increases in the cost of treatment may be offset by appreciation of the ETF.
What to Look Out For
- Sector ETFs tend to be more concentrated than broad index ETFs. That means they can be more volatile, and can involve greater long term risk if the largest stocks in the ETF performs poorly.
- Sector ETFs tend to have higher expense ratios than broader index ETFs.
- The HealthShares ETFs are not market cap weighted, and the periodic rebalancing of their indexes will likely lead to lower tax efficiency, potentially making them less suitable for long-term investing in taxable accounts.
- Merrill Lynch HOLDRs are fixed baskets of stocks that become less and less representative of their sectors over time. The Internet HOLDRs ETF, for example, doesn't include Google.
- This interview with HealthShares founder Jeffrey Feldman outlines the case for overweighting healthcare, and provides helpful discussion of the HealthShares ETFs.
- Articles on Healthcare, Pharma And Biotech ETFs: Diversified Pharma ETFs Are the Way to Go (Gary Gordon), Investing in Pharmaceuticals Via ETF (Larry MacDonald), 2 Biotech ETFs Differ Greatly in Constituents (Nick Perry), A Close Look at Five Biotech ETFs (H.S. Ayoub), First Trust's Biotech ETF: The Common Sense Approach (Carl Delfeld).
- Narrow theme ETFs tend to have higher expenses and spreads than broader index ETFs. See Matt Hougan's Watch Expenses & Spreads For HealthShares, PowerShares, WisdomTree ETFs.
- It's generally agreed that expenses have a significant impact on long-run returns. However, Michael Krause argues that ETF Fees Are Largely Irrelevant and Roger Nusbaum agrees.
- The case for and against sector ETFs is outlined in Should You Use Sector ETFs?.
- Read more about equal weight ETFs, fundamental sector ETFs, quant strategy ETFs, leveraged ETFs and inverse ETFs.
This page is part of The Seeking Alpha ETF Selector which sorts ETFs by type, highlights how to use them and what to look out for, and provides links to articles that discuss key issues for investors.