Everything you need to know about healthcare ETFs

The healthcare sector is considered a defensive sector – one that has some demand even during downturns and volatility. After all, healthcare services are essential, regardless of market conditions.
This is why healthcare is a popular investment avenue, and many investors choose to allocate a part of their portfolio to this sector to potentially provide a cushion during volatility. One such way of investing in the healthcare sector is through a Healthcare Exchange-traded Fund (ETFs). Let’s explore the healthcare ETF meaning, how to invest in healthcare ETFs, and the benefits and risks of this avenue.

• Table of contents

1. What is a healthcare ETF?
2. What are the benefits of investing in healthcare ETFs?
3. What are the risks of investing in healthcare ETFs?
4. How to invest in a healthcare ETF?

What is a healthcare ETF?

A healthcare ETF is an investment fund that pools money from multiple investors to buy a diversified portfolio of healthcare-related stocks. ETFs are passively managed, meaning that the portfolio replicates that of a benchmark index and aims to replicate its performance (subject to a tracking error). Two of the main indices that healthcare ETFs typically track are the Nifty Healthcare Index and the S&P BSE Healthcare Index. These indices, in turn, are composed of top-performing companies operating in various segments of the healthcare sector, such as pharmaceuticals, biotechnology, healthcare services, and medical equipment manufacturers.
Healthcare ETFs trade on stock exchanges like individual stocks, allowing for intraday trading.

What are the benefits of investing in healthcare ETFs?

Here are some advantages of investing in healthcare ETFs

• Exposure to many subsectors: Healthcare ETFs provide exposure to a range of companies and subsectors within the healthcare industry including pharmaceuticals, biotechnology and medical equipment manufacturers in addition to healthcare service providers. This reduces the risk associated with investing in individual healthcare stocks.
• Growth potential: The healthcare industry in India is poised for long-term growth due to factors such as an aging population, increasing healthcare awareness, government spending on health infrastructure, contract research and manufacturing opportunities and rising medical expenses.
• Lower volatility during economic downturns: The healthcare sector tends to be experience lower volatility* than the broad market during economic downturns, as medical services remain essential regardless of economic conditions.
  *Past performance may or may not be sustained in the future
• Easy to buy and sell: Since healthcare ETFs are traded on stock exchanges, they are easy to buy and sell. They also typically have lower expense ratios compared to actively managed mutual funds.

What are the risks of investing in healthcare ETFs?

Now that you know the healthcare ETF meaning and the benefits of investing in the best healthcare ETFs, you must understand the risks associated with investing in them:

• Regulatory risks: The Indian healthcare industry is heavily regulated, and changes in policies, such as drug pricing reforms or healthcare legislation can affect markets.
• Market volatility: Even though healthcare is a defensive sector, stock prices can fluctuate, especially in the short term.
• Company-specific risks: If a major company within the ETF faces issues such as failed drug trials, lawsuits, or regulatory scrutiny, it can negatively impact the ETF’s overall performance.
• Global events: Geopolitical events such as wars, uncertainty, currency fluctuations and other crises can create uncertainty, causing short-term market volatility.
• Concentration risk: Healthcare ETFs are concentrated on a single sector and any sector-specific risk can significantly affect your portfolio. Additionally, the sector may not always outperform the broad market.

How to invest in a healthcare ETF?

Here are the steps you need to follow to invest in the best healthcare ETFs:

Step 1: Open a brokerage account that offers access.

Step 2: Compare different ETFs based on their expense ratios, historical performance, holdings, etc.

Step 3: Invest in your chosen healthcare ETF.

Step 4: Monitor your investment regularly to review your portfolio.

Conclusion:

Healthcare ETFs can provide a convenient way to gain exposure to one of the most essential and growing sectors of the Indian economy. While investing in healthcare ETFs presents several opportunities, it is essential to be aware of the associated risks and conduct thorough research before investing.

FAQs:

What is a healthcare ETF and how does it differ from individual healthcare stocks?

A healthcare ETF invests in a diversified portfolio of healthcare stocks, offering broader sector exposure. Individual healthcare stocks represent a single company. Investing in individual stocks carries a higher risk.

What are the different types of Healthcare ETFs?

Healthcare ETFs in India commonly track either the Nifty Healthcare Index or the BSE Healthcare Index.

What are the advantages of investing in Healthcare ETFs?

Investing in healthcare ETFs offers long-term growth potential, exposure to several companies within the healthcare sector and cost-effectiveness compared to actively managed mutual funds. The healthcare sector can also potentially offer lower downside risk during volatility and downturns.

How can I invest in healthcare ETFs?

You need to open a brokerage account, choose an ETF, and then put in the trade order to invest in healthcare ETFs.

What are the potential risks of investing in Healthcare ETFs?

Potential risks of investing in Healthcare ETFs include concentration risk, sector-specific risks, regulatory changes, market volatility, technological disruptions and global crises. These factors can impact stock prices and overall ETF performance in India.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
This document should not be treated as endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.