This healthcare ETF is also rated ‘Strong Buy’ by Zacks.
Vanguard Healthcare ETF (VHT)
From The No-Load Fund Investor
With approximately $50 billion in assets spread across various share classes, Vanguard Health Care Fund (VGHCX, on low minimum Investor class shares) is the largest healthcare fund by assets.
The fund has been managed by Wellington Management for decades, and specifically since 2008 by Jean Hynes, a senior managing director and healthcare global industry analyst at the firm. Unlike the managers of most other actively managed healthcare funds, Hynes invests more with a ‘value’ style, not ‘growth,’ and is committed to devoting a substantial portion of assets to overseas stocks (currently about a quarter of assets). She seeks to invest in companies that look to provide solutions to the challenges facing the health care delivery system globally, by “shifting focus from volumes to value,” in other words, shifting from selling large numbers of pills to presenting economical, yet effective, treatment options.
Large healthcare stocks account for most assets, with pharmaceuticals being the largest portion, recently at 47%. Biotechnology follows at about 15%. However, the fund devotes only a small percentage of assets to smaller U.S. biotechnology stocks, which have been so key to generating truly outstanding returns for shareholders of some other healthcare funds and ETFs.
Many folks seem to labor under the misconception that Vanguard Healthcare ETF (VHT) is simply another share class of the Vanguard Health Care mutual fund, since that is the case with some of their ETFs.
Actually, these are very different products. While the mutual fund is an actively managed product with a decades-long performance history, distinctive portfolio construction and specific stock-picking philosophy, the ETF is an index product that attempts to replicate the risk and return of the MSCI US Investable Market Index (IMI)/Health Care 25/50, an index made up of stocks of large, midsize and small U.S. companies within the healthcare sector.
VHT has two broad industry groups. The first includes companies that manufacture healthcare equipment and supplies or provide healthcare-related services (such as distributors of healthcare products, providers of basic healthcare services, and owners and operators of healthcare facilities and organizations). The second includes companies primarily involved in the research, development, production, and marketing of pharmaceuticals and biotechnology products.
Compared to Vanguard Health Care Fund, the ETF has less in pharmaceuticals (a total of 28%) more in biotechnology (about 21%), and much more in medical technology/equipment (20%, vs. 12%). Interestingly, though the ETF has a considerably higher median market capitalization than the fund, it has a wider dispersion in terms of market capitalization, with at least 20% in small and midsize stocks, though nothing in overseas equities.
Considering everything, we prefer the ETF to the fund. Though the former leads the latter by only a percentage point or so in total return over the five-year period ended Sept. 30, 2018, it is leading by about five percentage points annually, 15.3% vs. 10.4%, over the past three. Though both provide broad types of exposure to the healthcare sector, holdings in the fund are too broad geographically and not broad enough therapeutically, at least for our taste.
Mark Salzinger, The No-Load Fund Investor, 800-706-6364, www.noloadfundinvestor.com, October 2018