Charles Shwab recently upgraded the sector to "outperform," saying companies' balance sheets are solid, dividend yields are attractive and after a mostly positive 2017, the year ahead is likely to bring continued strength. Demand is on the rise for healthcare products and services, and companies in this sector are flush with cash – all of which means better dividend yields and even stock buybacks that enhance shareholder value.

However, questions about the future of the Affordable Care Act and what might replace it are likely to keep the sector volatile over the year. So far, the sector has done well in early 2018, even as the Republican administration's vow to "repeal and replace" the ACA has hit repeated roadblocks. (See also: Healthcare ETFs See Modestly Higher Valuations.)

With the sector turning in a strong performance despite the policy-related uncertainty, the first half of 2018 might be the perfect time to dip your toes into the healthcare market. Take a look at these top healthcare exchange-traded funds (ETFs) that could be ready to gain on a bullish market. Funds were chosen on a combination of 2017 and current year-to-date (YTD) performance – and assets under management. All figures were current as of Jan. 25.

1. Health Care Select Sector SPDR ETF (XLV)

  • Issuer: State Street Global Advisors
  • 2017 YTD Performance: 21.77%
  • 2018 YTD Performance: 8.37%
  • Net Assets: $16.52 billion
  • Expense Ratio: 0.14%

XLV tracks the healthcare stocks in the S&P 500, weighted by market cap. It is the oldest fund in this segment and by far the largest. As a reflection of the U.S. healthcare market, this fund is hard to beat. It stands head and shoulders above its peers by nearly every metric – including liquidity and holding costs.

Of course, drawing from the S&P 500, the fund is heavily weighted toward mega caps – think Johnson & Johnson (JNJ), Pfizer Inc. (PFE) and UnitedHealth Group Incorporated (UNH). XLV is fairly concentrated, with the top 10 holdings making up nearly 52% of the fund's portfolio of 61 equities. XLV's one-year, three-year and five-year annualized returns are solid at 21.77%, 8.15% and 17.49%, respectively. (See also: 3 Charts Suggesting Traders Are Bullish on Healthcare.)

2. Vanguard Health Care Index Fund (VHT)

  • Issuer: Vanguard
  • 2017 YTD Performance: 23.26%
  • 2018 YTD Performance: 8.65%
  • Net Assets: $8.13 billion
  • Expense Ratio: 0.10%

Cheap and diversified, VHT holds 350 equities comprising the MSCI U.S. Investable Market Health Care 25/50 Index. It pulls healthcare stocks – pharmaceuticals, biotech, medical equipment, software and IT – from the top 98% of the total U.S. stock market capitalization. The ETF is still somewhat concentrated, however, with the top 10 holdings accounting for almost 45% of the fund's portfolio.

As with all Vanguard funds, VHT publishes its holdings only once a month, so there's less transparency compared with other funds. However, for buy-and-hold investors, that's rarely a problem. VHT offers broad exposure to the healthcare sector with a very friendly price tag. Its one-year, three-year and five-year annualized returns are 23.26%, 8.52% and 18.00%, respectively. (See also: Healthcare ETFs Head to Head: XLV vs. VHT.)

3. SPDR S&P Biotech ETF (XBI)

  • Issuer: State Street Global Advisors
  • 2017 YTD Performance: 43.77%
  • 2018 YTD Performance: 12.42%
  • Net Assets: $4.17 billion
  • Expense Ratio: 0.35%

This fund takes a novel approach to the U.S. biotech sector – it equal weights its portfolio, so performance is more tightly tied to small-cap companies, some of which have yet to bring a drug to market. The approach appears to be working, however, since XBI's impressive one-year, three-year and five-year annualized returns (43.77%, 11.35% and 24.33%, respectively) are crushing the competition.

XBI is a bit more expensive to own than other funds, but it's still relatively efficient for a straight sector play that tilts toward small caps. There are currently 92 equities in its basket of holdings, and the top 10 holdings account for just 16% of the fund's portfolio. (See also: Biotech's Breakout to Start in the Fourth Quarter.)

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