The 7 Best Health Care Funds to Buy

If you're looking for the best health care funds, you'll likely find them among a handful of low-cost mutual funds and ETFs. If you do it the right way, investing in sector funds can be a smart way to boost long-term returns. It can also help you minimize risk through diversification.

Narrowing down all the mutual funds and ETFs that invest in health stocks to a small list can be challenging, but if you know the best qualities to look for, choosing the best health care fund can be fairly easy.

What Is the Health Sector? 

The health care sector is also known as "health" or "specialty-health." It's a stock sector that focuses on the health care industry, which is quite broad and diverse. Some of the specific areas (or subsectors) within the health industry are hospital conglomerates; institutional services; insurance companies; pharmaceutical drug manufacturers; biotechnology companies; and manufacturers of medical devices.

Why Invest in Health Sector Funds?

Investors choose health sector funds for two main reasons: growth and diversification. Along with the technology sector, health is one of the fastest-growing sectors. With an aging population in the U.S. and advances in medical technology, health care can be a leading growth sector for years or decades to come.

The Baby Boom generation, born between 1946 and 1964, makes up the largest segment of the U.S. population. Now in their 50s, 60s, and 70s, Baby Boomers are the largest consumers of health products and services.

As for diversification, health stocks are considered defensive stocks, because they tend to perform well (or have lesser declines) in a bear market, even amid a recession, when consumer spending is down. People still need basic health products and services, such as medication, doctor visits, and emergency care.

The 7 Best Health Care Funds

There are dozens of mutual funds and ETFs that focus on health stocks, but only a handful combine no loads, low expense ratios, and solid long-term performance. In no particular order, here are the best health care funds.

1. Vanguard Health Care (VGHCX)

Vanguard only offers a few mutual funds that invest in sectors. VGHCX is one of the best and oldest on the market. It centers on health care stocks, such as Bristol-Myers Squibb (BMY) and UnitedHealth Group (UNH). VGHCX is one of the best-performing funds over the past 20 years. VGHCX could be a top performer over the next decade or more, benefiting from an aging population and advances in biotechnology and medical devices. Expenses are just 0.32%; the minimum initial purchase is $3,000.

2. Fidelity Select Health Care (FSPHX)

Fidelity invests in a diverse blend of stocks within the broad health care sector. This fund includes subsectors like pharmaceuticals, biotechnology, medical devices, and equipment. If you want to add health stocks to your portfolio and make a broad, long-term bet on the growth of the health sector, FSPHX is a smart choice for you. The expense ratio for FSPHX is 0.7%; the minimum initial purchase is $0.

3. Fidelity Select Medical and Equipment Systems (FSMEX)

FSMEX invests in companies that manufacture medical devices and other related businesses. The growing older population of the U.S. and world have created high demand for medical equipment and services; this trend is likely to continue for the foreseeable future. FSMEX is one of the highest-rated sector funds at Fidelity. It has a record of market-beating long-term returns. The expense ratio is 0.71%, and the minimum initial investment is $0.

4. Fidelity Select Bio-Technology (FBIOX)

This mutual fund invests in the biotechnology subsector of health care. FBIOX can be considered an aggressive stock fund. It is a good fit for long-term investors who don't mind the ups and downs. The expense ratio for FBIOX is 0.72; the minimum initial purchase is $0.

5. Vanguard Health Care ETF (VHT)

Vanguard's ETF is a smart choice for cost-conscious investors who prefer an ETF version to Vanguard's VGHCX. One of the most diversified health stock ETFs, VHT tracks the performance of the MSCI U.S. Investable Market Health Care 25/50 Index. It offers investors exposure to 430 stocks in the health sector. Expenses are just 0.10%.

6. Health Care SPDR ETF (XLV)

This stock focuses on pharmaceutical companies, biotechnology firms, medical device manufacturers, hospital corporations, and more. Health stocks are considered defensive, because they tend to hold their value better than the broad market during major declines. The expense ratio for XLV is 0.12%.

7. iShares Nasdaq Biotechnology ETF (IBB)

BlackRock's iShares may be the best ETF to buy for biotechnology stocks. The fund tracks the NASDAQ Biotechnology Index; it consists primarily of large-cap biotech stocks like Gilead Sciences and Amgen. The 0.46% expense ratio is slightly on the high side for an ETF, but it's still a good value for a diversified stock fund with good long-term growth potential.

The Bottom Line

When investing in sector funds, it's wise to remember to limit exposure to smaller allocation weights in your portfolio. A good range for most investors is between 5% and 10% of their entire portfolio. Health stocks are generally good diversification tools, but remember that some of the subsectors, such as biotechnology, can have significant volatility in the short term.

The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk, including the possible loss of principal.