Principal Healthcare Innovators: Earnings Not Wanted

This stock fund uses "counterintuitive" criteria to target small and midsize healthcare companies focused on innovation.

analyzing samples in test tubes
(Image credit: Getty Images)

The cutting-edge biotechnology used to create COVID-19 vaccines put a spotlight on innovative healthcare companies. But these kinds of early-stage firms come with a lot of risk for investors.

Outcomes tend to be "binary – either very good or very bad," says Matthew Raynor, a managing director of the U.S. strategic client group for Principal Global Investors.

Principal Healthcare Innovators Index ETF (BTEC (opens in new tab)) is an index fund that invests in a diversified group of roughly 300 small and midsize healthcare companies focused on innovation.

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The portfolio includes biotech firms, medical device makers and medical services businesses, among others. Size is a parameter for inclusion in the fund; holdings have an average market value of $4.8 billion. Stocks that have "graduated" from the fund as they've grown too large include COVID vaccine developer Moderna (MRNA (opens in new tab)), removed in April.

Profitability – or lack of it – is another requirement. Only those companies with inconsistent or negative earnings patterns are eligible for the portfolio. That may seem "counterintuitive" for a stock fund, says Raynor, but it enables the fund to zero in on companies that are "leading the charge toward innovative solutions rather than spending money on corporate overhead, marketing and distribution."

biotech-focused ETFs ranked by three-year returns

(Image credit: As of May 7, 2021. SOURCES: Morningstar, Principal, Yahoo Finance.)

That makes BTEC risky. But so far, it has been worth it. Over the past three years, the fund was 44% more volatile than the typical health care fund, but its three-year annualized return, 19.3%, beat 83% of the competition.

Nellie S. Huang
Senior Associate Editor, Kiplinger's Personal Finance

Nellie joined Kiplinger in August 2011 after a seven-year stint in Hong Kong. There, she worked for the Wall Street Journal Asia, where as lifestyle editor, she launched and edited Scene Asia, an online guide to food, wine, entertainment and the arts in Asia. Prior to that, she was an editor at Weekend Journal, the Friday lifestyle section of the Wall Street Journal Asia. Kiplinger isn't Nellie's first foray into personal finance: She has also worked at SmartMoney (rising from fact-checker to senior writer), and she was a senior editor at Money.