How to Invest in Healthcare Stocks the Easy Way

Staying healthy is the key to a good life. But healthcare is also a big business, and many of the world's largest corporations focus on providing products and services that help customers maintain their health.

You can find hundreds of individual healthcare stocks in every possible field, from prescription drugs and over-the-counter medications to sophisticated medical devices and innovative treatments involving the latest in biotechnology. Choosing the best healthcare stock can be a challenge, and that leads many investors to use the exchange-traded funds that concentrate their efforts on offering a wider range of healthcare stocks to meet your specific investing needs.

Top healthcare ETFs

Source: Fund companies, ETFdb.com.

Getting the entire healthcare sector

If you want complete exposure to healthcare, two of the funds above will give it to you at relatively low costs of 0.10% to 0.13%. Both the SPDR and Vanguard ETFs listed above hold stocks that cover the entire healthcare space.

The SPDR, for instance, has about a third of its assets in pharmaceutical stocks, with roughly 20% allocations to medical devices and equipment, biotech, and healthcare providers like hospitals and managed-care companies. Life-sciences companies make up the remainder of the portfolio. The fund has become an industry giant as part of the broader line of Sector SPDR ETFs.

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The Vanguard ETF has the same general philosophy, but it holds more than 350 different stocks, or more than five times the SPDR's holdings. Allocations across the space are relatively similar, with biotech getting a slight boost at the expense of pharmaceutical exposure. That slight difference in portfolio positioning played a role in the Vanguard ETF's slight outperformance over the past year, and because some of the smaller players in healthcare outperformed their larger counterparts, incremental exposure to the small end of the spectrum helped, as well.

Picking areas within healthcare

If you think certain areas of healthcare have better prospects than others, you can find more focused ETFs that meet your wishes. Biotech has been especially popular recently, and the iShares biotech ETF is just the largest of the many funds that concentrate on that area. More than 80% of its assets are invested in the biotech stocks that list on the Nasdaq Stock Market, with pharmaceutical and life-sciences stocks filling out the remainder. The iShares ETF is more expensive than its broader counterparts, with an expense ratio of 0.47%, but biotech's solid performance has helped it keep up despite the higher fees.

Other subsets have less of a following among investors but still allow tailored exposure. The iShares medical devices ETF concentrates on companies that provide medical devices and supplies, ranging from the most basic of products to the most sophisticated robotic surgery and other high-tech systems available to medical professionals right now.

The PowerShares ETF invests in those companies that produce treatments for patients, which include both traditional pharma, as well as some biotech stocks, and the fund has a healthy allocation of nearly 40% to small-cap players in those spaces to boost potential return. Lastly, the iShares healthcare providers ETF includes a vast array of health insurance and managed care companies, along with associated businesses like pharmacy benefits management. Treatment providers also make up a portion of the fund's assets.

Keep your portfolio healthy

Diversification is important to the health of your portfolio, and an allocation to healthcare stocks can be a smart move. These ETFs make it simpler to invest in healthcare, and with so many different options, you'll have a good chance of finding a fund that fits your needs.