Investing in exchange-traded funds (ETFs) is a popular strategy to beat the market and reduce risk compared to picking individual stocks.
Among the many options available, iShares U.S. Healthcare ETF (IYH) and iShares U.S. Both have stood out as the ETFs that have beaten the S&P 500 in the past decade. Both ETFs could be great options for long-term investors to buy now.
Why Healthcare ETFs?
Investing in these ETFs provides opportunities to focus on industries that have generally outperformed the markets, such as healthcare. The healthcare sector has benefited from demographic shifts, an aging population, and the development of new treatments and technologies.
Furthermore, national health spending is expected to increase by 5.5% per year until 2027, significantly faster than expected gross domestic product growth. Investing in healthcare ETFs can be a solid way to earn a good return as healthcare spending is likely to keep rising due to the aging U.S. population.
iShares U.S. Healthcare ETF
The iShares U.S. Healthcare ETF offers broad exposure to the domestic healthcare industry, with the largest fraction of the fund made up of pharmaceutical stocks, followed by healthcare equipment and biotech stocks. The top three holdings are:
- UnitedHealth Group
- Johnson & Johnson
- Eli Lilly
Other big names in the fund include AbbVie and Pfizer.
The expense ratio of the ETF is 0.39%, and it pays a dividend that yields a little over 1%. Over the past 10 years, the ETF’s returns total 252%, higher than the S&P 500’s total returns of 226%. A $10,000 investment in the ETF made a decade ago would be worth around $35,000 (before fees) today versus less than $33,000 if you invested in a fund mirroring the S&P 500.
iShares U.S. Healthcare Providers ETF
They focus on health insurance, diagnostics, and specialized treatments. The portfolio of the ETF has 69 holdings, with managed healthcare companies accounting for 43% of its weight, followed by healthcare services at 39%, and healthcare facilities at 14%.
UnitedHealth Group is one of the top holdings in the ETF, along with CVS Health and Elevance Health. The ETF’s more narrow focus can sometimes deliver better returns since too much diversification can chip away at overall returns. UnitedHealth Group makes up 21% of the Healthcare Providers fund’s total weight, versus just 9% in the broader U.S. Healthcare ETF. The U.S. Healthcare Providers ETF has delivered a higher total return of 286% over the past 10 years compared to the U.S. Healthcare ETF’s return of 252%, benefiting more from the strong performance of UnitedHealth Group.
Investing Considerations
Investors can’t go wrong with either of the two healthcare ETFs mentioned in the article. Investors should carefully weigh the diversification issue when deciding which fund is the better option for their preferred level of risk and desired exposure. While iShares U.S. Healthcare ETF provides broad exposure to the domestic healthcare industry, iShares U.S. Healthcare Providers ETF is a more specialized fund that focuses on specific healthcare providers.
Therefore, investors need to determine the level of diversification and specialization they want to invest in. For long-term investors, buying shares of either of these ETFs could set them up for great gains in the future.
