Vanguard Health Care ETF: A Gift That Keeps On Giving (NYSEARCA:VHT)


Some men succeed because they are destined to, but most men succeed because they are determined to. – Henry Ford

The Vanguard Health Care ETF (VHT) invests in the United States’ public equity markets by investing in the stocks of companies operating across health care sectors. It does this by investing in health care companies across diversified market capitalization.

The fund seeks to track the MSCI US Investable Market Index (IMI)/Health Care 25/50 Index performance. The MSCI US IMI Health Care 25/50 Index is designed to capture the US equity universe’s large, mid, and small-cap segments. All securities in the index are classified as being in the healthcare sector as per the Global Industry Classification Standard (GICS). The index also applies certain investment limits to help ensure diversification, imposed on regulated investment companies under the current US Internal Revenue Code.

Taking a ride down with the rest of the market, the fund’s price fell in March of 2020 to $139.96 as the pandemic took hold, and the market reacted to the events as they unfolded. However, the fund price showed a recovery to recoup its losses by June 2020 and then going on to reach its current high price of around $218. This shows how investors have expressed their confidence as the health care sector has not been negatively affected by the pandemic like other sectors.

Comparing the total return provided by the fund and the S&P 500, we can see a clear divergence between the two where the total return provided by the fund has been better than the S&P 500, even on the way down, showing a more robust recovery and with the final total returned by the fund standing at 23.92% compared to the 11.67% total return of the S&P 500.

This is again another indicator that the coronavirus pandemic has not affected every sector of the economy in the same way, where it has devastated some – perhaps most notably travel and energy – it has advanced others such as the health care sector. With the challenges being faced in the medical field due to the virus, a whole new wave of innovation has been seen as companies worldwide have attacked the deadly coronavirus’s problems. As a result, healthcare stocks have led the market rally.

The fund has a highly diversified portfolio with investments in 389 stocks, having invested in every player that makes up the Index. With investments weighed towards the industry heavyweights while maintaining smaller players’ investments to take advantage of any significant potential gains down the road.

The portfolio falls into two groups. The first group includes companies that manufacture health care equipment and supplies or provide health care related services (such as distributors of health care products, providers of basic health care services, and owners and operators of health care facilities and organizations). The second group includes companies primarily involved in the research, development, production, and marketing of pharmaceuticals and biotechnology products.

Given the reality the world lives in now, with the new normal of the coronavirus, all healthcare companies have seen their stocks rise with investors betting on healthcare companies doing their bit to help defeat the virus, whether through personal protective equipment, medical devices, or through vaccines.

In this regard, Johnson & Johnson (JNJ), which has the most significant share of the fund’s investment portfolio, saw increased sales of its disinfectants and pharmaceuticals medicines. With the huge increase in demand for hand sanitizers, the company also jumped on this bandwagon to increase its sales. It also saw increased sales of medical devices as it at least tripled its production of personal protection equipment.

Increased awareness of health problems and the need for medical insurance had a knock-on effect on UnitedHealth’s (UNH) insurance business as the demand for health insurance products shot up.

And the likes of Merck (MRK), Pfizer (PFE), and Abbott (ABT) have been upping their virus testing and vaccine development game. Coronavirus testing has proven to be a significant key in controlling the outbreak and making important decisions like treatment protocols. Growing demand for test kits has reflected this. An Abbott Laboratories’ test rolled out in the form of a highly-portable kit provides results in 15 minutes could be a game-changer in this area as the speed of results is another critical area.

Similarly, massive demand for serological tests, also known as immunity tests, is being observed for the virus’s antibodies. Identifying the immunity level to the virus will be another aid in combating the severe concern of shortages of medical staff.

Investors are also betting on vaccine development as the first company to develop and distribute a viable vaccine will be able to reap the rewards in the billions of dollars. However, it is essential to remember that most medical experts do not expect a vaccine to be ready for human use until early 2021 at the earliest, but more probably towards the middle of next year.

The fund has provided a healthy increase in the dividend payout for investors and has recently seen a very high payout increase.

The fund’s dividend yield is 1.49%, which is a respectable rate, given that the normal market range is between 1.5% and 2%. The five-year compounded annual growth rate has impressive at 23.01% resulting in an annual payout of $3.18. With an expense ratio of 0.10%, which is relatively low compared to the more actively managed funds out there, means that investors get to keep more of their returns over time.

Risks

Healthcare and pharmaceuticals have always been a highly competitive sector, with plenty of players vying for limited medical dollars. However, the pandemic has proven a game-changer with it blowing the ceiling of demand for medical products and services, and with even more money to make once a vaccine is ready for delivery.

A more recent threat being faced by healthcare companies is cybersecurity. The increased alleged hacking from China and Russia has meant the theft of highly valuable intellectual property of vaccine development can result in considerable revenue losses and the write-off of research and development expenditure with nothing to show for it.

Not to mention, there are plenty of market risks with stocks trading at or near all-time highs during what is an uncertain economic time, at best.

Investor Takeaways

Healthcare is one of the sectors that has not only withstood the pandemic crisis but has benefited from it. With the pandemic showing no signs of slowing down and the benefits of vaccine sales yet to be reaped by the industry, now is the time to get in cheap. Investors should take advantage sooner rather than later.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: This writing is for informational purposes only and Lead-Lag Publishing, LLC undertakes no obligation to update this article even if the opinions expressed change. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. It also does not offer to provide advisory or other services in any jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Lead-Lag Publishing, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.

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