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Health-care stocks make up about 12% of Standard & PoorUs 500-stock index, so putting at least that much of your U.S. stock portfolio in the sector makes sense. But if you're shopping for a health-care sector fund, keep in mind that other funds in your portfolio probably have a big dose of health stocks already, so factor that into your calculations.
Our favorite health-care fund is T. Rowe Price Health Sciences (symbol PRHSX; 800-638-5660). Under manager Kris Jenner, a graduate of Johns Hopkins School of Medicine, the no-load fund posted an annualized return of 18% over the past five years to October 1, outpacing the Dow Jones Health Care index by an average of eight percentage points per year.
Large drug companies dominate the major health-care indexes, and just two stocks, Johnson & Johnson and Pfizer, account for as much as 20% of some measures. Jenner's portfolio, by contrast, tilts toward midsize firms. Roughly one-third of the fund is invested in biotech stocks, and its allocation to Big Pharma is low, at about 25% of assets. We think that's about right. The fund charges a reasonable 0.87% annually to cover expenses.
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Schwab Health Care (SWHFX; 800-435-4000), which uses a computer model to pick stocks, is another top-performing, low-cost fund. Lately, the model has been favoring shares of large companies, and Big Pharma dominates the top ten holdings, which make up about half the fund's assets (Schering-Plough, Merck and Pfizer are among the four biggest holdings). But it's hard to argue with the fund's record -- a 19% annualized return over five years. The expense ratio is 0.84%.
If you prefer an indexed approach to health stocks, we suggest two cheap exchange-traded funds. Annual expenses for Vanguard Health Care (VHT) and Health Care Select Sector SPDR (XLV) are 0.25% and 0.24%, respectively. SPDR S&P Biotech (XBI) is a good way to add some biotech to your existing health-care holdings, but donUt get carried away. A 5% allocation is more than enough for most investors. The fund charges 0.35% annually for expenses.
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