Published January 07, 2013
When it comes to health care ETFs, there are plenty for investors to choose from. How well acquainted folks are with all of their options in this sector is another story. Sure, it is safe to say that most investors know of the Health Care Select Sector SPDR (XLV), the Vanguard Health Care ETF (VHT) and the iShares Nasdaq Biotechnology Index Fund (IBB).
Beyond that trio and a couple of other funds, many health care ETFs toil in relative anonymity. However, in some cases, the obscurity of some unknown health care ETF belies the solid returns these funds have generated. In fact, some of the following ETFs have recently outperformed their more well-known rivals. That begs the question: Why has your broker forgotten to mention them?
First Trust Health Care AlphaDEX Fund (FXH) While the First Trust Health Care AlphaDEX Fund may not be the first health care ETF investors and the mainstream financial media think of, this fund is by no means small or thinly traded. FXH has over $629 million in assets under management and has traded an average of almost 258,500 shares per day over the last month, according to First Trust data.
As is the case with the other AlphaDEX fund, FXH's constituents are screened on momentum and value factors such as one year sales growth and book value to price. Unlike VHT and XLV, FXH's holdings are not excessively tilted toward blue-chip pharmaceuticals names. Rather, FXH offers broader exposure to biotechnology, health care providers and equipment makers as well pharmaceuticals names. The combination seems to be working as FXH has sharply outperformed VFH and XLV over the past year.
Market Vectors Pharmaceutical ETF (PPH) PPH can be viewed as the ETF that is perfect for the indecisive pharmaceuticals investor. The ETF's 26-stock lineup reads like a who's who of popular large-cap pharma stocks. Any other sub-sector exposure offered by PPH, be it biotechnology or health care equipment, comes by virtue of some of the ETF's holdings operating in those industries, not through pure plays on those themes.
Dow components Johnson & Johnson (JNJ) and Pfizer (PFE) combine for over 19 percent of PPH's weight while other top-10 holdings include Merck (MRK), Abbott Labs (ABT) and Teva Pharmaceuticals (TEVA). The rub with PPH is twofold. First, the ETF lagged FXH, VHT and XLV by wide margins in 2012. Second, the dividend yield is less than 2,7 percent, according to Market Vectors data, indicating income investors could do better with individual stocks such as Johnson & Johnson and Pfizer.
PowerShares Dynamic Biotechnology & Genome Portfolio (PBE) The conversation about biotech ETFs usually revolves around three funds: The aforementioned IBB, the SPDR S&P Biotechnology ETF (XBI) and the First Trust NYSE Arca Biotech Index Fund (FBT). That makes sense as that trio represents the largest biotech ETFs by assets and in 2012, XBT and FBT were among the best-performing sectors funds of any kind.
Interestingly, PBE shares something in common with FXH, that being both eschew traditional cap-weighting of their holdings. PBE's 30 holdings, which include familiar names such as Amgen (AMGN) and Gilead Sciences (GILD), are screened on criteria including price momentum, earnings momentum, quality, management action, and value, according to PowerShares.
Investors should note over 45 percent of PBE's weight goes to small-cap names, implying the ETF could get a lift from new drug approvals and/or increased biotech mergers and acquisitions activity. The other side of that coin is that there are no guarantees those scenarios will materialize.
iShares MSCI ACWI ex US Health Care Sector Index Fund (AXHE) The iShares MSCI ACWI ex US Health Care Sector Index Fund is the smallest ETF on this list with just $9.85 million in AUM, but that has not stopped the fund from gaining almost 17 percent in the past year. AXHE is true to its name in that none of its 69 holdings are based in the U.S., although plenty trade here, including Teva, Sanofi (SNY) and GlaxoSmithKline (GSK).
Like PPH, AXHE sports a dividend yield in the 2.7 percent area, barely more than half of what GlaxoSmithKline American depositary receipts yield. AXHE is also somewhat pricey, at least based on its price-to-book ratio, which is 5.95. AXHE has a beta of 0.94 against the S&P 500, according to iShares data.
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