Special 10-Part Series on the Premier Sector Funds: Health Care

Welcome to the second installment of my special 10-part series on the premier sector funds. This week, we home in on health care sector, one of the strongest and most stable ones in the market.

Health care stocks tend to be “recession proof” due to consistent demand for services regardless of whatever else is happening across the broader economy. And size-wise, health care is big — it made up 17.6% of gross domestic product (GDP) in the United States last year with growth forecast over the next decade: The Centers for Medicaid and Medicare Services project a 5.6 % average increase in national health spending by 2032.

With that in mind, let’s check out this behemoth of a sector by looking through the lens of The Health Care Select Sector SPDR Fund (XLV), a thematic exchange-traded fund (ETF).

XLV is the largest passive fund in health care and is focused on U.S. stocks. It is also one of the oldest, launched in 1998 by State Street. The fund invests in the 64 largest health care stocks, allocated across the sector, to provide investment results that correspond to the performance of publicly-traded equity securities of companies in the Health Care Select Sector Index. The fund includes securities that have been identified as health care companies by the Global Industry Classification Standard.

So, what does it mean to be invested in health care? Well, for XLV, it means that 31.16% of the fund is allocated to pharmaceuticals, 22.06% to health care equipment and supplies, 21.04% to health care providers and services, 15.61% to biotechnology and 10.13% to life sciences tools and services.

This relatively stable sector is often thought of as a good choice for uncertain times. It is also a growing sector, with an aging U.S. population driving up demand — some 66% of American adults use prescription drugs, a number that increases with age — alongside soaring demand for new weight loss drugs. Artificial intelligence (AI) has even made its way in, now integrated into health care services, research and innovation.

XLV captures a broad swath of the market through its 64 holdings, which are weighted by market value. While this may give investors pause, the fund does have diversified holdings to mitigate risk.

Top holdings include Eli Lilly and Company (LLY), 12.32%; UnitedHealth Group Incorporated (UNH), 9.55%; Johnson & Johnson (JNJ), 6.79%; AbbVie Inc. (ABBV), 5.88%; Merck & Co. Inc. (MRK), 4.93%; Thermo Fisher Scientific Inc. (TMO), 4.93%; Abbott Laboratories (ABT), 3.80%; Intuitive Surgical Inc. (ISRG), 3.69%; Danaher Corporation (DHR), 2.79% and Amgen Inc. (AMGN), 2.77%.

The fund has net assets of around $39.54 billion with a 1.54% dividend yield and a very low expense ratio of 0.09%. It is down 5.97% over the last three months, up 0.28% over the last month and 9.27% for the year to date.

Chart courtesy of Stockcharts.com.

The fund’s 10-year annual return by net asset value is 10.98% as of Sept. 30, slightly higher than the benchmark. Fund performance is consistent, with managers delivering an annual average of 13.2% over the past five years.

With 20% of the American population aged 65 and up by 2030 and one in four by 2060, demand for health care and everything that comes with that will only rise. With pharmaceutical giant Eli Lilly and health insurance giant UnitedHealth in the top two spots and leading an A-Team of sector securities, this fund passes the fitness test.

Be aware, however, that the health care sector has unique risk factors that require consideration. Investors should always do their due diligence before adding any stock, fund or ETF to their portfolio.

As always, I am happy to answer any of your questions about ETFs, so do not hesitate to send me an email. You just may see your question answered in a future ETF Talk.