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Investing in the healthcare sector: mutual funds or ETFs

Haiwei Chen (School of Management, University of Alaska Fairbanks, Fairbanks, Alaska, USA)
James Estes (Department of Accounting and Finance, College of Business and Public Administration, California State University San Bernardino, San Bernardino, California, USA)
William Pratt (Department of Finance, Oklahoma City University, Oklahoma City, Oklahoma, USA)

Managerial Finance

ISSN: 0307-4358

Article publication date: 9 April 2018




The purpose of this paper is to investigate how healthcare funds differ from healthcare exchange-traded funds (ETFs) in terms of delivering positive alpha, beta, and hedging against a market downturn risk. The authors consider which vehicle is more effective in providing diversification within the healthcare sector and to what extent can investors gain by diverting a portion of their holdings in the S&P 500 index fund into either a value-weighted healthcare fund portfolio or ETFs.


Pooled and individual regressions are employed to estimate single and four-factor models of 132 healthcare mutual funds and 43 healthcare ETFs over the past four decades. The authors performed additional regressions to test the performance of mutual funds and ETFs relative to market volatility, market downturns, and policy influence.


The authors find that both healthcare funds and ETFs provide significantly positive average alpha and hedge against a market downturn risk. Holding an all-stock portfolio such as the S&P 500 index fund can be improved by simply adding a value-weighted healthcare portfolio, resulting in both a higher return and a lower standard deviation. However, returns for these funds and ETFs perform poorly in a very volatile market. ETF returns increased with the passing of the Obamacare. Healthcare sector funds and ETFs declined with the recent criticism from Donald Trump since he became the apparent GOP nominee in July of 2016.


Extending the literature in both sample size and scope of issues, this paper provides investors and financial advisors with practical guidance for achieving higher portfolio return while lowering standard deviation. Additionally, this study documents policy influence on the returns of healthcare mutual funds and healthcare ETFs.



Chen, H., Estes, J. and Pratt, W. (2018), "Investing in the healthcare sector: mutual funds or ETFs", Managerial Finance, Vol. 44 No. 4, pp. 495-508.



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