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Will Health-Care ETFs Recover?

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Despite their defensive nature, health-care stocks have been hospitalized, falling around 24 percent on average over the past year. The swift decline has created attractive valuations within the sector causing some investors to scoop up beaten down health care shares.

Bruce Berkowitz, through his Fairholme Fund (FAIRX), has been overweighting health care stocks. Berkowitz’s five-star rated fund has a 38.13 percent exposure to the health care sector with Pfizer, Unitedhealth Group and WellPoint each being among the $7 billion fund’s Top 10 holdings.

Here are a few key ETFs that invest in health care stocks:

Health Care Select Sector SPDR (XLV). This ETF follows healthcare stocks within the S&P 500 and it covers stocks of companies involved in health care equipment and supplies, health care providers and services, biotechnology, and pharmaceuticals makers. With just over $2 billion in assets, XLV is the largest health care ETF.

In 2008, XLV declined by 23.15 percent compared to a 38.49 percent fall in the S&P 500. Johnson & Johnson (14 percent), Pfizer (10.36 percent), and Abbot Laboratories (5.77 percent) represent the fund’s three largest holdings in order. XLV’s annual expense ratio was lowered to 0.21 percent from 0.23 on January 31st.

Vanguard Health Care ETF (VHT). The Vanguard ETF follows the MSCI US Investable Market Health Care Index. This particular healthcare ETF is the most diversified among similar offerings and currently has 297 stocks. The median market size of health care stocks within VHT is $45.8 billion.

In 2008, VHT declined by 23.48 percent. Johnson & Johnson (12.10 percent), Pfizer (8.60 percent), and Abbot Laboratories (5.90 percent) represent the fund’s three largest holdings in order. VHT’s annual expense ratio is 0.25 percent.

PowerShares Dynamic Healthcare Sector Portfolio (PTH). This PowerShares health care ETF is more of a portfolio strategy than a market-index-based strategy. PTH isn’t just attempting to match the performance of major health care equity benchmarks; it’s trying to outperform them. Stocks within this ETF are selected using a proprietary quantitative formula that screens for factors like fundamental growth and valuation.

In 2008, PTH declined by 34.89 percent. Each of the 60 stocks within PTH receives a modified equal weighting. The underlying index is rebalanced every quarter and PTH’s annual expense ratio is 0.70 percent.

Ron DeLegge is the San Diego-based editor of


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