5 Sizzling Health Care Funds to Consider Now

Rydex Biotechnology

• Expense ratio: 1.37%
• 1-year return: 28.71%
• 5-year annualized return: 17.94%
• Rydex Biotechnology (RYOIX (opens in new tab), $90.71) takes a quasi-passive approach to the health care space.

The fund’s managers begin their investment process with biotech stocks that trade on U.S. exchanges. Managers then screen that list of potential holdings for liquidity and share price to come up with a final list of stocks for inclusion in the fund. Finally, the fund weights those stocks according to a “modified cap-weighting approach,” according to a company spokesman. That results in the fund’s weightings lying somewhere between a traditional capitalization-weighting approach (in which larger companies receive larger weightings) and an equal-weighting approach (in which all holdings receive the same weight in the fund).

That weighting approach results in a portfolio skewed somewhat more toward smaller companies than peers, which likely has boosted performance – though top holdings still include large companies such as AbbVie (ABBV (opens in new tab)) and Amgen (AMGN (opens in new tab)). Smaller companies generally beat large-company returns across all sectors. And in biotech, favoring small companies means reaping a bigger boost from those up-and-coming names successfully developing novel therapies.

The fund’s 1.37% expense ratio is high given its bare-bones management process. On the other hand, its 16% annualized return over the past 10 years has handily beaten some 88% of peers.

Fidelity Select Medical Technology and Devices Portfolio

• Expense ratio: 0.76%
• 1-year return: 28.77%
• 5-year annualized return: 21.48%
• Fidelity Select Medical Technology and Devices Portfolio (FSMEX (opens in new tab), $47.08), as the name suggests, focuses on shares of medical equipment and technology makers.

Manager Eddie Yoon has run the fund for more than a decade, relying on Fidelity’s deep bench of health care stock analysts. Yoon and team consider companies’ free cash flow, how companies are deploying capital, and firms’ likely future margins, in their process. In particular, the team seeks companies likely to benefit from secular trends, “such as the growing emerging-markets middle class and aging developed-world populations, both of which should continue to provide stable demand for the industry,” Yoon says.

Another secular trend Yoon is watching is what he describes as a shift in the U.S. to a “consumer-centric” model of healthcare. In this shift, he says, patients “will be asked to make more informed health care decisions and pay a greater percentage of their costs over time.” He believes tech firms that help to improve the health care system’s efficiency will benefit from this trend.

In particular, Yoon favors Cerner (CERN (opens in new tab)), a provider of software and analytics for health care providers; Benefitfocus (BNFT (opens in new tab)), an employee-benefits software provider; and Teladoc (TDOC (opens in new tab)), a provider of remote medical care.

Fidelity Select Health Care Services Portfolio

• Expense ratio: 0.78%
• 1-year return: 31.41%
• 5-year annualized return: 18.93%

At Fidelity Select Health Care Services Portfolio (FSHCX (opens in new tab), $98.05), manager Justin Segalini says he aims to identify companies with “durable competitive advantages.” Segalini scales his bets up or down depending on how undervalued he feels a stock is relative to peers. In particular, he favors stocks that he feels have been overly punished due to some type of temporary hurdle.

Unlike several of the other funds on this list, which have ridden to glory on small biotech names, this fund has been placing big bets on insurers. The fund’s top five holdings as of November were all insurance companies, and together accounted for a whopping 54.5% of assets.

Segalini is bullish on the fund’s top holding, UnitedHealth Group (UNH (opens in new tab)), which alone accounted for 25.3% of assets in November. He says the company’s competitive advantages derive not only from its scale – UnitedHealth is the largest U.S. health insurer – but also from its innovative technology offerings and its smart deployment of cash. (UnitedHealth has been widely lauded for its string of diversifying acquisitions in recent years.) The stock has returned 55.15% in the past year.

T. Rowe Price Health Sciences

• Expense ratio: 0.77%
• 1-year return: 31.42%
• 5-year annualized return: 20.84%
• T. Rowe Price Health Sciences (PRHSX (opens in new tab), $74.90) is managed with traditional, bottom-up stock analysis, relying on T. Rowe’s esteemed bench of stock analysts. Bakri, who holds a medical degree, only took over the reins at the fund in 2016. But he notes that T. Rowe Price has offered the fund for more than two decades, giving the firm’s broader health care analysis team deep experience in managing through a variety of market cycles.

One distinguishing feature of the fund, Bakri says, is that the team places special emphasis on identifying companies developing novel therapies and drugs. “Innovative therapeutics drive much of the long-term value creation within health care,” he says.

Currently, one of Bakri’s top picks is Sage Therapeutics (SAGE (opens in new tab)), which develops biopharmaceutical treatments for central-nervous system disorders. Sage is a so-called “clinical-stage company,” meaning it doesn’t yet have any products on the market and so has no revenue or earnings. But the company has reported impressive trial results for two of the company’s depression treatments in recent months, and investors have been cheering. Over the past three months, the stock has popped 169%.

Eventide Healthcare & Life Sciences N

• Expense ratio: 1.55%
• 1-year return: 49.92%
• 5-year annualized return: 23.55%

Eventide invests according to religious and socially responsible principles. So in addition to evaluating investments for their appreciation potential, manager Finny Kuruvilla looks for firms that are doing right by customers, employees and communities.

But Eventide Healthcare & Life Sciences (ETNHX (opens in new tab), $29.97) hasn’t sacrificed performance for its principles. Over the past five years, the fund has returned 23.55% annualized, beating 99% of peer health care funds, according to Morningstar. However, because the fund focuses on smaller and riskier companies, it tends to fall harder than peers when the sector reverses course. In 2016, for example, when the average healthcare fund shed 10.60%, the Eventide fund lost 16.20%.

The company sees the development of next-generation treatments – including gene editing and immuno-oncology – as secular themes that will drive biotech gains in coming years. Biotech stocks generally deliver their biggest performance pops during their early stages, when a company may be posting initial trial results that show the promise of a nascent therapy. Kuruvilla tends to favor those early-stage companies.

ETNHX’s top holding as of September (the last time the fund provided a holdings update) was Blueprint Medicines (BPMC (opens in new tab)), a company that doesn’t yet have products on the market but is developing promising targeted cancer therapies. The fund’s next biggest holding, Bluebird Bio (BLUE (opens in new tab)), is developing gene therapies to target blood disorders and other diseases. Blueprint shares popped 137.82% in the past year, while Bluebird’s stock surged 164.79%.