Vanguard Brings You Healthy Returns With Less Volatility

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About: Vanguard Health Care ETF (VHT), Includes: ABBV, ABT, AET, AGN, ALXN, AMGN, ANTM, BAX, BCR, BDX, BIIB, BMY, BSX, CAH, CELG, CERN, CI, DHR, ESRX, EW, GILD, HCA, HUM, ILMN, INCY, ISRG, JNJ, LLY, MCK, MDT, MRK, PFE, REGN, SPY, SYK, TMO, UNH, VDC, VRTX, ZBH, ZTS
by: Colorado Wealth Management Fund
Summary

The health care sector has seen great returns over the last decade.

With such great performance, overall PE ratios are running a bit high.

VHT offers a low cost way for investors to get an allocation to health care.

This research report was produced by Colorado Wealth Management Fund with assistance from Big Dog Investments.

Is the health care sector a bit inflated?

(Photo from reddit)

Maybe!

The Vanguard Health Care ETF (VHT) seeks to track a benchmark index that measures the returns of health care stocks.

Expenses & yield

Expense ratio is .10% and the current yield is 1.33%.

What does the index do?

Here’s the investment approach and what the index does from the Vanguard website:

Who would want the ETF?

VHT allocated over 98% of its holdings to the healthcare sector. This puts it into the defensive category for ETFs. Here’s the subsector breakdown from Vanguard:

This is good subsector diversification. Here’s a breakdown of the returns from the MorningStar website:

The turnover ratio is very low. The fund has performed well over the 1, 3, 5, and 10-year windows. It helped this sector tremendously to only go down a little over 15% during the 2007-2008 years which destroyed some sectors.

Here are total returns since inception from InvestSPY:

Risk & Environment

VHT has seen some great returns with less risk than the S&P 500 (SPY) over a significant amount of time. However, this has been historical. Future returns could say something entirely different given the financial sector took a massive hit during the recession and is unlikely to do the same during the next market downturn.

The financial sector dragged the returns of the S&P 500 during the last recession. In the next market panic, there is the possibility that health care will be the sector taking a significant beating. Health care tends to be defensive, as you can see from historical statistics (Max drawdown and beta). However, there’s no saying that health care may not be the catalyst to drive the next market panic.

While VHT has been a nice holding, the PE ratio is getting a bit high:

A PE ratio over 23x for an entire ETF worries me. This has been a great fund and I believe it’ll continue to be a go-to choice for diversifying among the healthcare subsectors. However, I believe now is the time to put VHT on the watch list. The Vanguard Consumer Staples ETF (VDC) is another defensive fund, but comes with a lower PE ratio. For a defensive allocation in the current market environment, I believe VDC to be the better choice.

Holdings

Here are the top 40 holdings:

Ticker

Company Name

% Allocation

(JNJ)

Johnson & Johnson

10.08%

(PFE)

Pfizer Inc

5.62%

(UNH)

Unitedhealth Group Inc

5.02%

(MRK)

Merck & Co Inc

4.96%

(AMGN)

Amgen Inc

3.56%

(MDT)

Medtronic Plc

3.42%

(ABBV)

Abbvie Inc

3.25%

(CELG)

Celgene Corp

2.84%

(BMY)

Bristol-Myers Squibb Company

2.62%

(GILD)

Gilead Sciences Inc

2.60%

(ABT)

Abbott Laboratories

2.36%

(LLY)

Eli Lilly And Co

2.30%

(AGN)

Allergan Plc

2.29%

(TMO)

Thermo Fisher Scientific Inc

1.94%

(BIIB)

Biogen Inc

1.65%

(AET)

Aetna Inc

1.50%

(DHR)

Danaher Corp

1.48%

(ANTM)

Anthem Inc

1.40%

(SYK)

Stryker Corp

1.31%

(BDX)

Becton, Dickinson And Co

1.24%

(CI)

Cigna Corp

1.21%

(ESRX)

Express Scripts Holding Co

1.09%

(REGN)

Regeneron Pharmaceuticals Inc

1.08%

(BSX)

Boston Scientific Corp

1.06%

(ISRG)

Intuitive Surgical Inc

1.02%

(HUM)

Humana Inc

1.01%

(MCK)

Mckesson Corp

0.98%

(VRTX)

Vertex Pharmaceuticals Inc

0.90%

(ZTS)

Zoetis Inc

0.86%

(BAX)

Baxter International Inc

0.83%

(ALXN)

Alexion Pharmaceuticals Inc

0.77%

(--)

Cmt Market Liquidity Rate

0.73%

(HCA)

Hca Healthcare Inc

0.73%

(ZBH)

Zimmer Biomet Holdings Inc

0.72%

(ILMN)

Illumina Inc

0.71%

(EW)

Edwards Lifesciences Corp

0.71%

(CAH)

Cardinal Health Inc

0.69%

(BCR)

C.R. Bard Inc

0.64%

(INCY)

Incyte Corp

0.60%

(CERN)

Cerner Corp

0.55%

I took the top batch of holdings and plugged them into CPMS.

CPMS Assessment

Each stock was ranked by their relative performance on several metrics with the each metric carrying its own weighting.

The weights were:

25% Dividend Yield

25% P/E on current year estimated earnings

12.5% P/E on next year’s consensus earnings

12.5% 5-year beta

5% market capitalization

12.5% price to sales

5% EV to EBITDA

2.5% price to cash flow

Any investor with the program could assign their own weightings, but I felt these were very useful metrics across most sectors.

Conclusion

The Vanguard Health Care ETF (VHT) is a good option for investors seeking to get allocation to the health care sector. I believe the sector has performed so well over the last decade that it could see a material drawdown in the next market panic. However, this would still be a decent option for a long-term investor who really wanted some allocation to the health care sector. It’d fit really well alongside VDC. I prefer the current price on VDC and waiting for better opportunities to enter VHT.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: No financial advice. Investors are expected to do their own due diligence and consult with a professional who knows their objectives and constraints. CWMF actively trades in preferred shares and may buy or sell anything in the sector without prior notice. Tipranks: No ratings in this article.