Is Fidelity's Health Care ETF A Good Buy Right Now?

Core Insights - Healthcare investing is characterized by defensive traits during market volatility, but regulatory and political risks can lead to abrupt selloffs [1] - Fidelity MSCI Health Care Index ETF (FHLC) offers a low-cost entry point for investors seeking exposure to the healthcare sector without selecting individual stocks [1] Fund Overview - FHLC tracks the MSCI USA IMI Health Care Index, providing exposure to U.S. healthcare companies across various segments including pharmaceuticals, biotechnology, medical devices, and health insurance [2] - The fund has an expense ratio of 0.084% and includes over 80 holdings, focusing on capital appreciation and modest dividend income [2] Concentration Risk - Eli Lilly constitutes over 13% of FHLC's portfolio, linking its performance closely to GLP-1 obesity drugs, which have seen a 46% increase in stock price over the past year [3] - The top five holdings also include UnitedHealth, Johnson & Johnson, Merck, and AbbVie [3] Performance Analysis - FHLC has shown strong short-term performance, gaining 5.3% in the last month and 17.9% over the past year, outperforming the S&P 500 [4] - However, over five years, FHLC returned 42.6%, significantly lagging behind the S&P 500's 84.5% return, with a widening gap over ten years (154% vs. 235%) [4] Sector Challenges - The underperformance of FHLC reflects broader challenges in the healthcare sector, including drug pricing pressures and slower innovation cycles outside oncology and rare diseases [5] - Recent momentum may indicate potential sector rotation, but investing after outperformance carries inherent risks [5] Policy and Income Considerations - Investors face political and regulatory uncertainties, with an 87.5% probability that enhanced ACA premium tax credits will expire by January 2026, impacting health insurers like UnitedHealth [7] - FHLC's yield of 1.33% is considered modest compared to other market alternatives, with dividend growth of approximately 4.6% annually over five years, barely keeping pace with inflation [8] Suitability for Investors - Growth-focused investors seeking maximum capital appreciation may find FHLC unsuitable due to its long-term underperformance [9] - Retirees prioritizing income generation may also find better yield opportunities in other sectors without sacrificing stability [9] Alternative Options - Vanguard Health Care ETF (VHT) is presented as an alternative, with a slightly higher expense ratio of 0.09%, larger asset base of $20.4 billion, and a higher dividend yield of 1.38% [11] - VHT's longer track record since 2004 and superior liquidity may provide additional confidence for long-term investors [11] Tactical Allocation - FHLC may serve as a tactical allocation for investors seeking low-cost exposure to the healthcare sector, but concentration risk and historical underperformance necessitate careful position sizing [12]