ETF Research written by the Barchart.com ETF Research Team

Last Updated: September 21, 2011

Table of Contents

1. Introduction
2. U.S. Broad Health Care ETFs
3. U.S. Health Care Small-cap
4. Leveraged and Short U.S. Health Care ETFs
5. Global Health Care ETFs
6. Narrower U.S. Health Care Segments
7. U.S. Health Care Provider ETFs
8. U.S. Medical Devices ETFs
9. U.S. Pharmaceuticals ETFs
10. Biotechnology
11. U.S. Biotech Leveraged Long and Short ETFs

Introduction

Health Care is one of the major sector categories as defined by the Global Industry Classification Standard (GICS), along with other top-level sectors such as Information Technology, Telecom, Energy, Financials, and others.  GICS then breaks down the Health Care sector into two major Industry Groups:  (1) Health Care Equipment & Services, and (2) Pharmaceuticals, Biotechnology & Life Sciences.

The ETF industry provides many ETFs in the Health Care sector.  We will first cover broad U.S. and global Health Care ETFs.  We will then move on to the more narrowly-defined ETF categories of Pharmaceuticals, Health Care Providers, Medical Devices, and Biotechnology.

U.S. Broad Health Care ETFs

Healthcare Select Sector SPDR Fund (XLV) (issuer web site link) – This fund, launched in December 1998, has $3.8 billion in assets under management.  The fund has an expense fee of 0.20%.  The fund tracks the Healthcare Select Sector Index.  The fund holds 52 U.S.-listed stocks.  The five top holdings are:  Johnson & Johnson (13.0%), Pfizer (11.6%), Merck (7.7%), Abbott (4.9%), and UnitedHealth (4.0%).

Vanguard Health Care Index Fund (VHT) (issuer web site link) – This fund, launched in January 2004, has $660 million in assets under management.  The fund has an expense fee of 0.24%.  The fund tracks the MSCI U.S. Investable Market Health Care 25/50 Index.  The fund holds 294 U.S.-listed stocks.  The five top holdings are:  Johnson & Johnson (10.5%), Pfizer (9.5%), Merck (6.3%), Abbott (4.7%), and Amgen (3.1%).

iShares Dow Jones US Healthcare Sector Index Fund (IYH) (issuer web site link) – This fund, launched in June 2000, has $530 million in assets under management.  The fund has an expense fee of 0.47%.  The fund tracks the Dow Jones U.S. Health Care Index.  The fund holds 123 U.S.-listed stocks.  The five top holdings are:  Johnson & Johnson (12.5%), Pfizer (10.7%), Merck (7.1%), Abbott (5.6%), and United Health Group (3.7%).

First Trust Health Care AlphaDEX Fund (FXH) (issuer web site link) – This fund, launched in May 2007, has $170 million in assets under management.  The fund has an expense fee of 0.70%.  The fund tracks the StrataQuant Health Care Index.  The fund holds 72 U.S.-listed stocks.  The five top holdings are:  Regeneron Pharmaceuticals (3.0%),Perrigo (2.7%), Cephalon (2.6%), Eli Lilly (2.5), Watson Pharmaceuticals (2.5%), Catalyst Health Solutions (2.4%).

PowerShares Dynamic Healthcare Sector Portfolio (PTH) (issuer web site link) – This fund, launched in October 2006, has $60 million in assets under management.  The fund has an expense fee of 0.65%.  The fund tracks the Dynamic Health Care Sector Intellidex Index.  The fund holds 60 U.S.-listed stocks.  The five top holdings are:  WellPoint (2.7%), Intuitive Surgical (2.6%), Aetna (2.6%), UnitedHealth Group (2.6%), and Humana (2.6%).

U.S. Health Care Small-cap

PowerShares S&P SmallCap Health Care Portfolio (PSCH) (issuer web site link) – This fund, launched in April 2010, has $110 million in assets under management.  The fund has an expense fee of 0.29%.  The fund tracks the S&P SmallCap 600 Capped Health Care Index.  The fund holds 70 U.S.-listed stocks.  The five top holdings are:  Regeneron Pharmaceuticals (9.5%), HealthSpring (4.8%), HMS Holdings (4.1%), Cubist Pharmaceuticals (3.8%),and Questcor Pharmaceuticals (3.5%).

Leveraged and Short U.S. Health Care ETFs

There is one leveraged long ETF and one leveraged short ETF in the Health Care sector, both provided by ProShares.  However, we recommend staying away from these ETFs because they both have a low level of assets under management and that raises questions about their longevity. 

The ProShares Ultra Health Care (RXL) (issuer web site link) seeks to provide twice (2X) the daily return of the Dow Jones U.S. Health Care Index.  The fund was launched in January 2007 and has $35 million in assets under management and an expense fee of 0.95%. 

The ProShares UltraShort Health Care (RXD) (issuer web site link) seeks to provide twice the inverse (-2X) of the daily return of the Dow Jones U.S. Health Care Index.  The fund was launched in January 2007 and has $4 million in assets under management and an expense fee of 0.95%. 

Figure 1:  Comparison of Vanguard Health Care Index Fund (VHT), Healthcare Select Sector SPDR Fund (XLV), and iShares Dow Jones US Healthcare Sector Index Fund (IYH) (live chart link)

Our pick for the broad U.S. Health Care ETF group – Our pick for the broad U.S. Health Care ETF group is the Vanguard Healthcare ETF (VHT) mainly because of its better return performance on both the monthly and weekly charts relative to its two main competitors, the Healthcare Select Sector SPDR Fund (XLV) and iShares Dow Jones US Healthcare Sector Index Fund (IYH).  While SPDR’s XLV has the largest amount of assets under management in the group by far at $3.8 billion, Vanguard’s VHT still has a substantial amount of assets at $660 million, which gives it plenty of liquidity and narrow bid-offer spreads.  On the negative side, Vanguard’s VHT has an expense ratio of 0.24% that is slightly higher than 0.20% for SPDR’s XLV, but we believe the higher returns that have been produced by Vanguard’s VHT more than offset the slightly higher expense fee.  We also like Vanguard’s VHT because it is more diversified in holding 294 stocks, versus only 52 stocks held by SPDR’s XLV.  That means that XLV has a higher weight on the big stocks in the sector and thus has more single-company risk than the more diversified Vanguard VHT, which is a negative factor for XLV.

Global Health Care ETFs

iShares S&P Global Healthcare Sector Index Fund (IXJ ) (issuer web site link) – This fund, launched in November 2001, has $500 million in assets under management.  The fund has an expense fee of 0.48%.  The fund tracks the S&P Global Health Care Sector Index, a subset of the S&P’s Global 1200 Index.  The fund holds 84 globally-listed stocks.  The five top holdings are:  Johnson & Johnson (8.3%), Novartis (7.4%), Pfizer (6.9%), Roche (5.3%), and GlaxoSmithKline (5.1%).

 SPDR S&P International Health Care Sector ETF (IRY) (issuer web site link) – This fund, launched in July 2008, has $18 million in assets under management.  The fund has an expense fee of 0.50%.  The fund tracks the S&P Developed Ex-U.S. BMI Health Care Sector Index.  The fund holds 86 globally-listed stocks.  The five top holdings are:  Novartis (12.7%), Roche (9.1%), GlaxoSmithKline (8.7%), Sanofi (6.4%), and Astrazeneca (5.2%).

 iShares MSCI ACWI ex U.S. Health Care Sector Index Fund (AXHE) (issuer web site link) – This fund, launched in July 2010, has $5 million in assets under management.  The fund has an expense fee of 0.48%.  The fund tracks the MSCI All Country World ex USA Health Care Index.  The fund holds 61 globally-listed stocks.  The five top holdings are:  Novartis (12.5%), Roche (12.4%), GlaxoSmithKline (11.4%), Sanofi (7.8%), and Astrzeneca (4.7%).

Figure 2:  Comparison of iShares S&P Global Healthcare Sector Index Fund (IXJ ) and Vanguard Health Care Index Fund (VHT)  (live chart link)

Our pick for a global Health Care ETF -- The iShares S&P Global Healthcare Sector Index Fund (IXJ ) is the only substantive ETF in the global segment since the other two ETFs, SPDR’s IRY and iShares AXHE, have minimal assets under management and their longevity is therefore in question.  iShares IXJ is therefore our pick for the global Health Care sector.  We like the exposure to all the world’s major health care companies that iShares iXJ provides since Health Care is clearly a global industry where there are many major players that have their stocks listed outside the U.S.  However, we must note that iShares IXJ has underperformed our U.S. Health Care pick, Vanguard’s VHT, on both the monthly and the weekly charts.  Nevertheless, we are still choosing iShares’ IXJ as our overall pick for the broad Health Care category due to the fact that we believe exposure to all of the world’s major health care companies trumps the difference in historical performance.

Narrower U.S. Health Care Segments

Now that we have discussed ETFs in the broad Health Care sector, we turn to narrower segments of the health care industry including Health Care Providers, Pharmaceuticals, Medical Devices, and Biotechnology.  The Health Care Provider segment focuses on companies that primarily provide health care insurance coverage for patients, companies like UnitedHealth Group (UNH) and Wellpoint Health Networks (WLP). 

The Medical Device segment focuses on companies that provide physical products, other than medicines, that are used in health care for diagnosis, prevention, monitoring or treatments of humans.  The Medical Device category includes a wide variety of products from tongue depressors to X-ray machines, stents, and artificial hip implants.  This group includes companies such as Medtronic (MDT) and Covidien (COV).

The Pharmaceuticals segment focuses on companies engaged in the research, development or production of pharmaceuticals, i.e., drugs and medicines that act through biochemical processes for medical treatment.   This group includes companies such as Bristol-Myers Squibb (BMY) and Eli Lilly (LLY).

U.S. Health Care Provider ETFs

iShares Dow Jones US Health Care Providers Index Fund (IHF) (issuer web site link) – This fund, launched in May 2006, has $210 million in assets under management.  The fund has an expense fee of 0.47%.  The fund tracks the Dow Jones U.S. Select Health Care Providers Index.  The fund holds 49 U.S.-listed stocks.  The five top holdings are:  United Health Group (15.3%), Wellpoint (9.5%), Express Scripts (8.7%), Medco Health Solutions (7.6%), and Aetna (5.9%).  We would recommend this fund for investors who are specifically looking for exposure to the narrower segment of Health Care Providers since this fund has sufficient size to assure liquidity and longevity and since its fee is reasonable.

U.S. Medical Devices ETFs

iShares Dow Jones US Medical Devices Index Fund (IHI) (issuer web site link) – This fund, launched in May 2006, has $360 million in assets under management.  The fund has an expense fee of 0.47%.  The fund tracks the Dow Jones U.S. Select Medical Equipment Index.  The fund holds 40 U.S.-listed stocks.  The five top holdings are:  Medtronic (12.7%), Covidien (8.9%), Thermo Fisher (7.6%), Intuitive Surgical (6.9%), and St Jude Medical (6.2%).  We would recommend this fund for investors who are specifically looking for exposure to the narrower segment of Medical Devices since this fund has sufficient size to assure liquidity and longevity and since its fee is reasonable.

U.S. Pharmaceuticals ETFs

SPDR S&P Pharmaceuticals ETF (XPH) (issuer web site link) – This fund, launched in June 2006, has $215 million in assets under management.  The fund has an expense fee of 0.35%.  The fund tracks the S&P Pharmaceuticals Select Industry Index, which is an equal-weighted market cap index.  The fund holds 30 U.S.-listed stocks.  The five top holdings are:  Jazz Pharmaceuticals (6.6%), Questcor Pharmaceuticals (5.0%), Perrigo (4.6%), Bristol Meyers Squibb (4.5%), and Watson Pharmaceuticals (4.4%).

iShares Dow Jones US Pharmaceuticals Index Fund (IHE) (issuer web site link) – This fund, launched in May 2006, has $190 million in assets under management.  The fund has an expense fee of 0.47%.  The fund tracks the Dow Jones U.S. Select Pharmaceuticals Index.  The fund holds 38 U.S.-listed stocks.  The five top holdings are:  Johnson & Johnson (9.7%), Pfizer (8.7%), Merck (7.4%), Abbott (7.1%), and Bristol-Myers Squibb (6.3%).

PowerShares Dynamic Pharmaceuticals Portfolio (PJP) (issuer web site link) – This fund, launched in June 2005, has $160 million in assets under management.  The fund has an expense fee of 0.63%.  The fund tracks the Dynamic Pharmaceuticals Intellidex Index.  The fund holds 30 U.S.-listed stocks.  The five top holdings are:  Bristol-Myers Squibb (5.1%), Abbott Labs (5.1%), Eli Lilly (5.0%), Pfizer (5.0%), and Amgen (5.0%).

Figure 3:  Comparison of SPDR S&P Pharmaceuticals ETF (XPH), iShares Dow Jones US Pharmaceuticals Index Fund (IHE), and PowerShares Dynamic Pharmaceuticals Portfolio (PJP) (live chart link)

Our ETF pick in the Pharmaceuticals group – There are three ETFs in the Pharmaceuticals group, all with fairly similar sizes in terms of assets under management.  Yet each ETF presents a very different type of exposure to the sector.  The SPDR S&P Pharmaceuticals ETF (XPH) is the largest ETF in the sector by a modest margin and provides equal-weighted exposure to the sector.  The iShares Dow Jones US Pharmaceuticals Index Fund (IHE) provides traditional market-cap weighted exposure to the sector with a heavier weight on the large-cap stocks in the sector such as Johnson & Johnson and Pfizer.   PowerShares Dynamic Pharmaceuticals Portfolio (PJP) uses an active selection method and equal-weighting in order to try to beat a passive index. 

Based purely on performance, PowerShares’ PJP is the winner taking into account the monthly chart and the weekly chart.  However, PowerShares’ PJP is the smallest ETF in the sector and has the highest expense fee of 0.63%.  Also, the return of the ETF is based on the Intellidex selection methodology, which may or may not work in the future. 

For investors who are more comfortable with a traditional passive index, the choice comes down to the equal-weighted SPDR XPH or the market-cap weighted iShares IHE.  For our money, we would choose the SPDR XPH because it outperforms iShares IHE on both the monthly and weekly charts and has a lower expense fee of 0.35% versus 0.47%.  Also we like the equal-weight methodology of the SPDR XPH because it gives an equal weight to small as well as large cap pharmaceutical companies, delivering more exposure to smaller pharmaceutical companies that are traditionally the proving grounds for many new drug treatments.

Biotechnology

iShares Nasdaq Biotechnology Index Fund (IBB) (issuer web site link) – This fund, launched in February 2001, has $1.4 billion in assets under management.  The fund has an expense fee of 0.48%.  The fund tracks the NASDAQ Biotechnology Index.  The fund holds 126 U.S.-listed stocks.  The five top holdings are:  Amgen (7.7%), Pharmasset (7.0%), Celgene (5.9%), Alexion Pharmaceuticals (5.5%), and Gilead Sciences (5.2%).

SPDR S&P Biotech ETF (XBI) (issuer web site link) – This fund, launched in January 2006, has $450 million in assets under management.  The fund has an expense fee of 0.35%.  The fund tracks the S&P Biotechnology Select Industry Index.  The fund holds 44 U.S.-listed stocks in an equal-weighted market cap index.  The five top holdings are:  Regeneron Pharmaceuticals (4.4%), Alexion Pharmaceuticals (4.4%), Pharmasset (4.3%), Biomarin Pharmaceutical (3.8%), and Celgene (3.5%).

First Trust AMEX Biotechnology Index Fund (FBT) (issuer web site link) – This fund, launched in June 2006, has $400 million in assets under management.  The fund has an expense fee of 0.60%.  The fund tracks the NYSE Arca Biotechnology Index, which is an equal-weighted index.  The fund holds 20 U.S.-listed stocks.  The five top holdings are:  Regeneron Pharmaceuticals (7.4%), Alexion Pharmaceuticals (6.9%), Celgene (6.2%), Amgen (6.1%), and Gilead Sciences (5.8%).

PowerShares Dynamic Biotechnology & Genome Portfolio (PBE) (issuer web site link) – This fund, launched in June 2005, has $150 million in assets under management.  The fund has an expense fee of 0.63%.  The fund tracks the Dynamic Biotechnology & Genome Intellidex Index.  The fund holds 30 U.S.-listed stocks.  The five top holdings are:  Regeneron Pharmaceuticals (5.9%), Alexion Pharmaceuticals (5.3%), Amgen (5.0%), Life Technologies (5.0%), and Biogen Idec (4.9%).

U.S. Biotech Leveraged Long and Short ETFs

There are two leveraged biotech ETFs but we recommend staying away from these products due to their very low assets under management. 

The ProShares Ultra Nasdaq Biotechnology (BIB) (issuer web site link) tracks twice (2X) the daily performance of the NASDAQ Biotechnology Index.  The fund has an expense fee of 0.95%.  This fund was launched in April 2010 and has $15 million in assets under management.

The ProShares UltraShort Nasdaq Biotechnology (BIS) (issuer web site link) tracks twice the inverse (-2X) of the daily performance of the NASDAQ Biotechnology Index.  The fund has an expense fee of 0.95%.  The fund was launched in April 2010 and has only $4 million in assets under management.

Figure 4:  Comparison of SPDR S&P Biotech ETF (XBI), iShares Nasdaq Biotechnology Index Fund (IBB), and First Trust AMEX Biotechnology Index Fund (FBT) (live chart link)

Our pick in the U.S. Biotech ETF group – Our pick in this group is the SPDR S&P Biotech ETF (XBI).  SPDR XBI has $450 million in assets, which is well below $1.4 billion for iShares Nasdaq Biotechnology Index Fund (IBB), but is still more than enough to assure good liquidity and narrow bid-offer spreads.  We are choosing SPDR XBI because its performance is currently better than iShares IBB on both the monthly and weekly charts.  First Trust’s FBT has good performance on the monthly chart, but it has not performed well on the weekly chart and we do not like the fact that it holds only 20 stocks, which is an unusually small number for an ETF and therefore means that there is relatively high single-company risk. 

We also like SPDR XBI because it has the lowest expense fee in the group of 0.35% and because of its equal-weighting methodology, compared with the market-cap weighting for iShares IBB.  The equal-weighting methodology means that SPDR XBI gives as much weight to small-cap biotech firms as it does to large-cap firms.  There are often more exciting new product developments at smaller-cap firms compared with the large, more risk-averse firms.

By the Barchart.com ETF Research Team
Last Updated:  9/12/2011

ETP's mentioned: XLV, VHT, IYH, FXH, PTH, RYH, PSCH, RXL, RXD, IXJ, IRY, AXHE, IHF, IHI, XPH, IHE, PJP, IBB, XBI, FBT, PBE, BIB, BIS

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