investing

This Health Care ETF Wins With More Exposure to Smaller Firms

Guggenheim S&P 500 Equal Weight Health Care approach to success is right there in its name.

Exchange-traded funds that focus on health care stocks tend to tilt toward the titans—companies such as Johnson & Johnson (symbol JNJ), Merck (MRK) and Pfizer (PFE). Those stocks have their merits. But the companies aren’t growing rapidly. For that, you’ll need to invest in smaller firms with more dynamic growth potential.

Guggenheim S&P 500 Equal Weight Health Care (RYH), a member of the Kiplinger ETF 20, doesn’t play favorites when it comes to a company’s size. As its name implies, the fund holds 62 stocks in equal proportions, each about 1.6% of the portfolio. Businesses such as Mettler-Toledo—a precision-instruments firm with a market value of $16.1 billion—carry as much weight in the ETF as J&J, valued at $349 billion. The mix, says Guggenheim, reduces bias toward the health care giants and provides more exposure to smaller firms with potentially superior stock returns.

Equally weighting stocks has been a winning strategy for the ETF. Mettler, for instance, has gained a total of 514% over the past decade—three times as much as big drug companies such as J&J (returns are as of September 29). Stocks such as Mettler have powered the ETF to an annualized return of 12.6% over the past 10 years, beating the 10.9% gain of the S&P 500 Health Care index (which weights stocks by market value). Impressively, the ETF has outperformed the index even though it has a somewhat steep expense ratio of 0.40%.

The ETF does have some drawbacks, one being meager dividends. Stocks in the fund yield an average of 0.9%, about half the health care industry average and well below what you can scoop up with a giant such as J&J (yielding 2.6%) or Pfizer (3.6%).

The ETF may also be a bit riskier than a health care fund secured by more weight in large companies. In 2016, the Guggenheim fund lost 4.5% (including dividends). That compares with a decline of 2.8% for the Health Care Select SPDR ETF (XLV), which ranks stocks by market cap and is tilted toward the heavyweights.

Overall, health care stocks look appealing. Many are benefiting from increased spending on insurance, medical devices and prescription drugs. That is helping a record proportion of companies beat analysts’ estimates for sales and profits. Yet the stocks as a group still look inexpensive, says Bank of America Merrill Lynch, which recommends the sector.

The big unknown, of course, is what to expect from the industry’s largest benefactor: Washington. Cuts in government spending on health care could lower revenues for hospitals, insurers and other firms. Analysts would then trim their sales and profit estimates, and the stocks could take a hit.

But even if Congress hits the brakes, spending growth would slow but not stop. The medical needs of an aging population will inevitably push up demand for health care, a trend that should make this ETF a long-term winner.

Most Popular

Don’t Be Tricked Into Voluntarily Paying Higher Taxes on Your IRA
IRAs

Don’t Be Tricked Into Voluntarily Paying Higher Taxes on Your IRA

Traditional IRAs are set up in a way that basically incentivizes you (and your heirs) into paying the highest tax bill possible. Don’t fall for it. Co…
July 4, 2022
Your Guide to Roth Conversions
Special Report
Tax Breaks

Your Guide to Roth Conversions

A Kiplinger Special Report
February 25, 2021
Retirees, Make These Midyear Moves to Cut Next Year's Tax Bill
Tax Breaks

Retirees, Make These Midyear Moves to Cut Next Year's Tax Bill

Save money next April by making these six hot-as-July tax moves.
July 1, 2022

Recommended

5 Exciting Emerging Markets Funds
Foreign Stocks & Emerging Markets

5 Exciting Emerging Markets Funds

Emerging markets funds haven't been immune to global inflationary pressures. But now might be the time to strike on these high-risk, high-reward produ…
July 5, 2022
How to Go to Cash
investing

How to Go to Cash

What exactly does it mean to 'go to cash,' and what should you do once you have?
July 5, 2022
Protect Your Portfolio: 10 Defensive ETFs
ETFs

Protect Your Portfolio: 10 Defensive ETFs

Want to prevent a further portfolio beating across the rest of 2022? These defensive ETFs can provide some market cover.
July 1, 2022
Is the Stock Market Closed for the Fourth of July in 2022?
Markets

Is the Stock Market Closed for the Fourth of July in 2022?

Independence Day falls on a Monday in 2022, so the bond and stock markets will enjoy a long holiday weekend. Here's a look at the markets' holiday hou…
July 1, 2022