Healthcare Sector Investing

One of the reasons the January Effect was interesting to me this year is that I've been considering putting some money in the healthcare sector for the long term. One of my healthcare stocks (I still own a few individual stocks) has disappointed me for 2 years now, so it's time for that stock to go. I'll put that money into a healthcare sector ETF; question is which one?

First, the 2 main ETFs:

Ticker	Name	2001	2002	2003	2004	2005	2006
IYH	Ishares DJ US Healthcare	-13.31	-21.29	18.35	4.22	7.66	6.16
VHT	Vanguard Healthcare Vpr					8.2	6.54

There's a 3rd option I don't have in the table yet; IXJ, the iShares Global Healthcare sector ETF. NOTE: I've added IXJ to the chart and you can view it here.

If you look at the limited back data the chart shows, the Vanguard ETF has an edge; this could well be due to Vanguard's low expenses.

IYH's top 5 holdings are Johnson and Johnson, Pfizer (both over 10)%, Merck, Abbot Labs, and Amgen. VHT's top 5 holdings are the same. IXJ's top 5 are JNJ, Pfizer, Noven Pharmaceutical, Rogers CP and GlaxoSmithKline.

Diversification and global reach are important to me. I like a global index, and IXJ has 35% of it's holdings in international companies vs. 15% in other healthcare ETFs. Plus 1 for IXJ.

The thing is, large caps make up 90% of its holdings, according to Morningstar (this index is a subset of the S&P Global 1200 index, almost all largecaps). If the huge healthcare companies aren't moving, this index won't move. In addition, IXJ has only 7% of its holdings in biotech, less than average, vs. 17% for the Vanguard ETF.

In the end, the Vanguard ETF VHT seems to offer some international coverage (somewhere around 15%), good biotech diversification, and the usual low Vanguard expense ratio - in this case 0.25%.

I'm only moving between 1% and 2% of the portfolio here, but the Vanguard ETF looks like the best call.