Healthcare ETFs Head To Head: XLV Vs. VHT

The healthcare sector has been in the spotlight lately. President Donald Trump targeted drug companies and accused them of charging extremely high prices (read: ETFs in Focus as IMF ups Global Growth Forecast).

Market Movers

"Prescription drug prices are out of control. The drug prices have gone through the roof," Trump said in a meeting, adding, "The drug companies frankly are getting away with murder. We want to bring our prices down to what other countries are paying."

In a latest executive order, Trump aimed at scrapping a key component of Obamacare. The President said that he wanted to end subsidies to insurers that cost $7 billion this year and help millions of low-income Americans pay medical expenses.

The uncertainty was reduced to some extent as news of the two political parties coming to a bipartisan deal started doing the rounds. Senators of both parties said they reached a deal to stabilize Obamacare for the short term and allow insurer subsidies. However, changes in the deal might be in the cards as it has to be passed by the Congress and signed by Trump first.

“The solution will be for about a year or two years; it’ll get us over this intermediate hump” Trump said. Let us now discuss two ETFs focused on providing exposure to the healthcare sector.

Health Care Select Sector SPDR Fund XLV

This fund seeks to provide exposure to healthcare stocks and tracks the Health Care Select Sector Index. It has AUM of $17.6 billion and charges a moderate fee of 14 basis points a year. It has 62 holdings and bears significant concentration risk as almost 50% of the assets are allocated to the top 10 holdings (read: Should You Keep Your Portfolio Healthy with Biotech ETFs?).

From a sector look, the fund has high exposure to Pharmaceuticals, Biotech and Health Care Providers & Services, with 33.6%, 21.9% and 19.1% exposure, respectively (as of Sep 30, 2017). The fund’s top three holdings are Johnson & Johnson (NYSE:JNJ) , Pfizer (NYSE:PFE) and Unitedhealth (NYSE:UNH) with 11.1%, 6.8% and 6.1% allocation, respectively (as of Sep 30, 2017). The fund has returned 17.9% in a year and 19.0% year to date (as of Oct 16, 2017). XLV currently has a Zacks ETF Rank #2 (Buy) with a Medium risk outlook.

Vanguard Healthcare ETF (AX:VHT)

This fund seeks to provide exposure to healthcare stocks and tracks the MSCI US Investable Market Health Care 25/50 Index. It has AUM of $7.2 billion and charges a moderate fee of 10 basis points a year. It has 360 holdings and bears significant concentration risk as almost 45% of the assets are allocated to the top 10 holdings.

From a sector look, the fund has high exposure to Pharmaceuticals, Biotech and Health Care Equipment, with 30.5%, 24.6% and 17.9% exposure, respectively (as of Sep 30, 2017). The fund’s top three holdings are Johnson & Johnson, Pfizer and Unitedhealth with 9.6%, 5.9% and 5.2% allocation, respectively (as of Sep 30, 2017). The fund has returned 19.6% in a year and 20.6% year to date (as of Oct 16, 2017). VHT currently has a Zacks ETF Rank #2 with a Medium risk outlook.

Bottom Line

XLV is more popular than VHT, as is evident from its higher AUM. However, VHT may be more appealing to investors, owing to its cheaper expense ratio. VHT also has a more diversified exposure in terms of number of holdings.

Moreover, VHT outperformed XLV both on a year to date basis and in a year. VHT returned 1.6% more than XLV so far this year whereas in a year, it returned 1.7% more than XLV.

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