Healthcare ETFs: Why Have Investors Stayed Away?

Few ETFs have been as sickly as the Vanguard Health Care Fund (VHT). It has negative performance returns for 1 week, 1 month, 3 months, 6 months and 1 year. (Pass the Ibuprofen!)

Granted, an 11% loss over 1 year pales in comparison to 28% losses in many financial services ETFs. Yet some believe that financials present "once-in-a-lifetime" opportunities going forward. In contrast, I simply haven't heard the same upbeat chatter with regard to healthcare investing.

It was a different story 4 1/2 years ago. I recall participating in a live radio broadcast at the "Investing in Yourself" Conference in Costa Mesa, California. Specifically, a respected speaker on the panel expressed that a long-term investor could "not go wrong with healthcare due to incredible spending on the aging boomers."

True, Vanguard Health Care Fund (VHT) has gained ground. Yet it hasn't been as strong as defensive sectors like Utilities (XLU), Consumer Staples (XLP), or even as reasonable as Vanguard's Total Market Index Fund (VTI).

What's ailing the healthcare segment? Some have suggested that investors are wary of the political arena and the eventual probability that the government will ultimately nationalize the health system.

Pharmaceutical companies have been the biggest laggards. And perhaps with good reason. Lengthy FDA approval, scores of competitors, the threat of litigation... not to mention the push towards socialized medical delivery.

Perhaps the lesson for investors, however, is the need to target more specialized areas. In previous columns, I've discussed the soaring profitability of medical device makers, regardless of political trends. That makes the iShares Medial Devices Fund (IHI) a better long-term hold than Vanguard Health Care (VHT).

Another investment that is likely to win as baby boomers age? Nursing home operators. Granted, so many of these facilities failed in the 90s due to scandals and lawsuits. Nevertheless, the surviving providers have growth stronger and corresponding healthcare REITS are going to throw off predictable revenue streams for decades.

There are ETFs for residential, industrial and mortgage REITs. In contrast, there isn't an exchange-traded fund for health care REITs... not yet.

That said, individual real estate investment trusts (REITs) exhibit many of the same aspects of exchange-traded funds already. Favorable tax treatment, diversification across companies, and intra-day trading.

For instance, Health Care REIT (HCN) invests in healthcare and senior housing facilities across the United States, including assisted living facilities, skilled nursing facilities and independent living care retirement communities. They are diversified across 195 assisted living facilities, 203 skilled nursing facilities and 31 independent living care retirement communities.

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