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3 Mutual Funds to Gain From Strength in U.S. Healthcare

Zacks Equity Research
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A steady influx of foreign as well as domestic investments in U.S. healthcare has gone a long way in boosting gains for the space. Further, a burgeoning economy has necessitated diversification by the top players in the industry.

The health care sector ended 2018 on a high. As a matter of fact, the Health Care Select Sector SPDR expanded 2.5% in 2018, emerging as one of the two sectors to end the year in the green. This can be attributed to a higher-than-usual number of FDA approvals as well as continued influx of funds into the sector.

Per a recent study, U.S. healthcare has caught the fancy of American and foreign venture capitalists alike. Under such encouraging conditions, investing in health care mutual funds seems prudent.

Congress Seeks to Establish Fair Drug Pricing

Per the terms of the latest proposal by the Centre for Medicare and Medicaid Services (CMS), a new drug pricing model is to be established. To be in use from 2020 through 2025, this model will be a reference pricing model.

The model will use the International Pricing Index (IPI) to reach a consensus by referring to international prices for selected Part B drugs. Further, new drugs will be assessed by a joint committee of providers, insurers and hospital organizations. Further, patient groups will have a non-voting position in the committee.

However, customers will have to take into account the minimum as well as the median price of that drug in any therapeutic class. Such an arrangement distributes costs evenly between the manufacturer and the patient and establishes a fair pricing system which is beneficial to both parties.

Venture Investment and IPOs to Propel Health Care

Chinese venture-capital funds have invested a whopping $1.4 billion in U.S. biotech and drug companies in the period between January and March 2018. There were about 76 health care IPOs in 2018. Coming to average returns, health care IPOs posted an average return of 8.9% on total proceeds worth $9.1 billion.

Meanwhile, Series A investments across the biopharma sector witnessed an increase of 56%, led by oncology and platform firms. It is largely expected that this trend will continue across the health care sector in 2019. Analysts expect venture money pouring into health care to reach about $8 billion in 2019.

3 Best Choices

We have, thus, selected three health care mutual funds with a Zacks Mutual Fund Rank #1 (Strong Buy) or 2 (Buy) that are poised to gain from such factors. Moreover, these funds have encouraging three and five-year returns. Additionally, the minimum initial investment is within $5000.

We expect these funds to outperform their peers in the future. Remember, the goal of the Zacks Mutual Fund Rank is to guide investors to identify potential winners and losers. Unlike most of the fund-rating systems, the Zacks Mutual Fund Rank is not just focused on past performance, but also on the likely future success of the fund.

The question here is: why should investors consider mutual funds? Reduced transaction costs and diversification of portfolio without several commission charges that are associated with stock purchases are primarily why one should be parking money in mutual funds (read more: Mutual Funds: Advantages, Disadvantages, and How They Make Investors Money).

Fidelity Select Portfolio Medical Technology And Devices Portfolio FSMEX invests 80% of its assets in securities of companies engaged in manufacturing and distribution of medical devices and equipment. The fund invests in both U.S. and non-U.S. stocks.

This Zacks sector – Health product has a history of positive total returns for more than 10 years. To see how this fund performed compared in its category, and other 1 and 2 Ranked Mutual Funds, please click here.

FSMEX has a Zacks Mutual Fund Rank #1 and an annual expense ratio of 0.75%, which is below the category average of 1.28%. The fund has three and five-year return of 23.1% and 18%, respectively.

T. Rowe Price Health Sciences PRHSX invests a major portion of its net assets in common stocks of companies involved in research, development, production, or distribution of products or services related to health care and life sciences. PRHSX may invest in companies of any size, however, majority of its assets is invested in large and mid-capitalization companies.

This Sector – Health product has a history of positive total returns for more than 10 years. Specifically, the fund's returns over the one and five-year benchmarks are 14.5% and 12.8%, respectively. To see how this fund performed compared to its category, and other #1 and 2 Ranked Mutual Funds, please click here.

PRHSX has a Zacks Mutual Fund Rank #2 and an annual expense ratio of 0.77%, which is below the category average of 1.28%.

Vanguard Specialized Portfolios Health Care Fund VGHCX seeks long-term capital growth by investing in securities of companies that are engaged in production and distribution of products and services from the health care industry. The fund may invest about half of its assets in non-U.S. stocks.

This Zacks sector – Health product has a history of positive total returns for more than 10 years. To see how this fund performed compared in its category, and other 1 and 2 Ranked Mutual Funds, please click here.

VGHCX has a Zacks Mutual Fund Rank #2 and an annual expense ratio of 0.38%, which is below the category average of 1.28%. The fund has three and five-year return of 8.9% and 10.7%, respectively.

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