Vanguards in Healthcare

11/17/2016 8:00 am EST

Focus: HEALTHCARE

Mark Salzinger

Editor and Publisher, The No-Load Fund Investor

With healthcare stock under a political cloud, this had been the market’s worst performing sector in 2016; I believe that healthcare represents one of the best areas for long-term growth and investment performance, explains Mark Salzinger, editor The No-Load Fund Investor.

In fact, of Vanguard’s 11 sector ETFs, Vanguard Health Care (VHT) is the only one with a loss through October. In addition to VHT, which is an index product, Vanguard offers an actively managed healthcare mutual fund: Vanguard Health Care (VGHCX).

The latter could be considered the grandfather of healthcare sector funds, as it has been around since 1984, and has a whopping $47.7 billion in assets spread among its various share classes.

Its current manager is Jean Hynes, a Wellington veteran; she is assisted by six healthcare equity portfolio managers and analysts.

Compared to the Vanguard Health Care mutual fund, the Vanguard Health Care ETF has more holdings (348 versus 74, as of Sept. 30) and a higher median market capitalization ($81.0 billion versus $42.2 billion).

Its portfolio has a lower aggregate price/earnings ratio, as well as higher recent earnings growth. The ETF has only U.S. healthcare companies, while the fund currently dedicates roughly 20% of assets overseas.

The ETF has only five percentage points or so less in pharmaceutical and biotechnology combined than the fund, but the mix is different, with more in biotechnology (more than 22% in the case of the ETF) and less in pharmaceuticals (33.3%).

So far in 2016, the ETF has lost 6.2%, which is actually not nearly as bad as the performance of most actively managed healthcare funds.

Over the past 10 years, its 9.8% annualized total return trails the return of Vanguard Health Care Fund by 0.30 percentage points annually, and is extremely competitive generally. The expense ratio is only 0.09%, and the turnover ratio is in the single digits.

With healthcare stocks down in price, I believe investors would be wise to increase their exposure to this area. Most of the time, either of these Vanguard alternatives would be fine.

However, as we enter the last two months of the year, investors within taxable accounts should consider the tax ramifications of all their fund purchases.

That would make Vanguard Health Care ETF the choice within taxable accounts, while investors within tax-deferred accounts could go either way.

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By Mark Salzinger, Editor The No-Load Fund Investor

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