With a rapidly aging population, longer life expectancy, and medical breakthroughs, the healthcare sector is poised to be one of the fastest growing in the coming decade, suggests Rida Morwa, editor of High Dividend Opportunities.

We believe that having broad and diversified exposure to the sector is the best way to do it, rather than investing in individual companies. The two funds discussed below accomplish this by providing immediate diversification to the healthcare sector.

Tekla Healthcare Opportunities Fund (THQ) is a closed-end fund (CEF) that invests in healthcare companies: pharmaceutical companies, healthcare providers, medical equipment companies, medical technology, and even real estate.

THQ invests in companies that operate in the U.S. or get most of their revenue from US-based operations. If you see your doctor, you could be using one or more properties with a connection to THQ.

The healthcare sector is a defensive one since the demand for it is inelastic. One thing to note about THQ is that only about 25% of the portfolio is invested in healthcare providers. So if you are concerned about labor issues at hospitals and eldercare facilities, THQ only has limited exposure to those types of businesses.

The fundamentals for most businesses in this sector are strong and inevitable. The U.S. consumer is aging, and the demand for medical care is rising. Pharmaceuticals remain quite profitable, and nearly 30% of THQ's portfolio is invested in them.

Healthcare, in general, also remains resilient to economic conditions; you need them when you need them, not just when the economy is doing well.

We unquestionably want healthcare represented in our portfolio. The aging of the Baby Boomer generation puts higher demands on the healthcare system. This increasing demand makes for a great place to look for investments. The question is where to find yields in the range we want.

This is where the active management of a CEF can play a big role. The fund actively selects companies to invest in and uses leverage to boost both the gains it makes and the income it receives. Between the leverage and the realized gains, THQ can produce a distribution that meets our requirements.

Instead of large unrealized capital gains that can disappear like mist, we get a tangible monthly distribution deposited into our brokerage account — actual cash and not just numbers on a brokerage statement. THQ provides us with both competitive exposure to the healthcare sector and generous cash flow.

Looking at returns over the last five years, most of the time, THQ matches or exceeds the healthcare sector while providing superior cash flow. Meanwhile, the discount to net asset value is now below the 5-year average. Furthermore, the discount has declined quite a bit in the last six months. This makes it a great time to buy THQ.

Tekla World Healthcare Fund (THW) is very similar to THQ but includes investments outside of the U.S. Tekla World owns an even larger percentage of pharmaceutical companies than THQ (39.4% versus 29.8%) and a small percentage of healthcare providers (16.2% versus 24.4%).

The smaller percentage of healthcare providers in the company with investments outside the U.S. makes sense because fewer such entities are in private hands outside of the U.S.

Much like THQ, THW has the majority of its portfolio in the U.S., about 78.4%. However, 22.4% of the portfolio is made up of U.S. companies that have substantial revenue coming from sources outside of the U.S. The remainder of the top 10 regions are relatively rich countries in Europe and Asia.

Like THW, THQ also turns capital gains into cash flow. The higher distribution from THW tends to result in lower total returns because more cash is flowing out of the fund and into shareholders' pockets.

THW has paid the same monthly distribution of $0.1167 since the fund began in August 2015. The price is currently at a premium to NAV, which is being sustained by the larger yield. For investors who are looking to maximize current yield and are willing to sacrifice longer-term total returns for cash today, THW is an excellent high-yield way to gain exposure to the healthcare sector.

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