A Health Care Recession Play

Jim Woods

Jim Woods has over 20 years of experience in the markets from working as a stockbroker, financial journalist, and money manager.

When we look at the market so far in 2022, you don’t need me to tell you that the market has taken a beating.

While there have been some days of late where it seems that the bulls have defeated the bears and the market rose a bit as a result, overall, it seems that the bears are still driving the market bus. Such a negative market milieu has impelled many investors to turn to defensive sectors to protect their hard-earned money.

One such sector is health care. Indeed, according to Reuters, health care is the sector of the S&P 500 that has performed the best. So far this year, it has only fallen by 8.7%. For comparison, the S&P 500 has fallen by 20% over the same time frame.

A large part of this enthusiasm for the health care sector is due to the reasonable valuation of the stocks in the sector (as compared to, say, technology) and the confidence of investors that the sector is in good shape if the country were to slide into a full-blown recession due to excessive monetary tightening by the Fed.

History, again, according to Refinitiv IBES data, seems to bear this out. During the Great Recession, the sector posted earnings growth, while earnings for the entire market fell for several consecutive months.

One health care-related exchange-traded fund (ETF) is the Vanguard Health Care Index Fund (NYSEARCA: VHT).

This ETF tracks an index of health care companies in the United States. The fund’s managers define “health care” rather broadly, ensuring a healthy mix of sectors in the portfolio. In addition, a policy that no group entity exceeds 25% of the weight of the index, as well as a rule that the aggregate weight of issuers with over 5% weight is capped at 50% of the portfolio, ensures a degree of diversification.

The top holdings in the portfolio are Johnson & Johnson (NYSE: JNJ), UnitedHealth Group (NYSE: UNH), Pfizer Inc. (NYSE: PFE), AbbVie, Inc. (NYSE: ABBV), Eli Lilly and Company (NYSE: LLY), Merck & Co., Inc. (NYSE: MRK), Thermo Fisher Scientific (NYSE: TMO) and Abbott Laboratories (NYSE: ABT).

As of July 20, VHT has been up 9.16% over the past month and down 6.20% for the past three months. It is currently down 9.51% year to date.

Chart courtesy of www.stockcharts.com

The fund has amassed $16.07 billion in assets under management and has an expense ratio of 0.10%.

While VHT does provide investors with access to health care stocks, this kind of ETF may not be appropriate for all portfolios. Thus, interested investors always should conduct their due diligence and decide whether the fund is suitable for their investing goals.

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