The Vanguard Health Care ETF (VHT), established in 2004, tracks a benchmark measuring the returns of stocks in the health care sector. Its holdings include stocks that provide medical or health care products, services, technology and equipment. As of October 2018, the fund has achieved annual average returns of more than 10% since its inception. 


VHT is an open-ended fund managed by Vanguard. Like many Vanguard funds, it has an extremely low expense ratio of 0.10%. According to Vanguard, this expense ratio is 92% lower than that of comparable ETFs. Since the fund is passively managed, it has very little turnover, at a rate of 4.30%, and the expense ratio does not include any applicable brokerage fees or commissions. 

The fund contains 369 stocks and tracks the MSCI U.S. Investable Market Health Care 25/50 Investable Index. When it comes to sector diversification, the fund has 28.50% of its holdings in pharmaceuticals, 20.30% in biotechnology and 20.20% in health care equipment, and 12.70% in managed health care. The rest of the holdings are spread across the sector, including supplies, facilities, services, technology, distributors, and life sciences tools and services, at percentages of 6.40% and lower. 

Companies with the fund's 10 largest holdings comprise 42% of its $10.3 billion in net assets. As of Sept. 20, 2018, those companies were Johnson & Johnson, Pfizer, United Health Group, Merck & Co., AbbVie, Amgen, Medtronic, Abbott Laboratories, Eli Lilly & Co., and Bristol Myers Squibb Co. 

Suitability and Recommendations

VHT is a good choice for those investors who want to gain exposure to the health care sector. It is highly diversified due to its large number of holdings. Still, as with all investments, it comes with some risk. Since the benchmark is constructed using market capitalization rules, the fund is weighted toward larger pharmaceutical companies. The price-to-earnings (P/E) ratio is 33, which is fairly high. The price-to-book (P/B) ratio is 4.3. 

The fund is geared toward a growth portfolio. Investors who subscribe to modern portfolio theory (MPT) may want to diversify with bond funds to minimize the overall risk to their portfolio. VHT contains no debt instruments that pay regular interest.

There is a drawback to the market-weight capitalization of the fund. VHT does not have much exposure to smaller biotech and pharmaceutical companies that could have high growth potential or be targets for acquisitions. These smaller companies also have a greater amount of risk. One adverse administrative ruling from the FDA could cause a smaller company’s stock to tumble. Investors who are less risk-averse may want to use equal-weighted ETFs to invest in smaller pharmaceutical and biotech companies.

As of 2018, the fund has experienced great performance. It has seen average annual returns of 19.99% in the past year, 15.32% over three years, 15.77% over five years and 14.73% over 10 years. Many market observers are questioning whether there is a current biotech bubble that could be ready to pop since there have been a number of initial public offerings (IPOs) in the sector.