Vanguard Healthcare Fund: A Smart Investment Move?

The Vanguard Health Care Fund is a mutual fund that falls within Morningstar's health category. It is one of Vanguard's best sector funds, beating the performance of the stock market average and its sector-fund peers by investing exclusively in companies in the healthcare industry. As of November 27, 2023, the fund has assets totalling almost $42.77 billion invested in 126 different holdings. The fund offers exposure to both domestic and foreign stocks within the health and medical fields, including pharmaceutical companies, HMOs, and medical device makers. The fund's expense ratio is 0.37%, which is considered low for funds in this category. Vanguard's healthcare fund compares strongly against its peers in performance, low expenses, and good management. However, it is probably best kept as a small portion of your total portfolio to maintain diversification.

Low fees and strong performance

The Vanguard Health Care Fund is a solid choice for investors seeking low fees and strong performance. Here's why:

Low Fees

Vanguard is known for its low-cost approach, and the Vanguard Health Care Fund is no exception. With an expense ratio of 0.34% to 0.37%, it is considered low-fee for its category by Morningstar. The Admiral share class version of the fund offers an even lower expense ratio of 0.32%, but requires a higher minimum initial investment of $50,000 compared to the regular fund's $3,000. Vanguard's ability to keep fees low is particularly notable given that actively managed funds typically have higher operating expenses than passive index funds.

Strong Performance

The Vanguard Health Care Fund has delivered strong performance over the years. As of November 27, 2023, the fund had assets totaling nearly $42.77 billion invested in 126 different holdings. While its level of return is average for the trailing three-, five-, and 10-year periods, it has still generated solid returns. Over the past year, the fund returned -1.66%, but over the past three years, it returned 5.59%, over the past five years, 7.38%, and over the past decade, 9.69%.

The fund's performance compares favourably against its peers. For example, for the year through October 6, 2020, the average healthcare mutual fund outperformed the S&P 500, 10.9% to 5.5%. Over the past decade, healthcare funds have averaged 15.5% returns annually, outperforming the broader market by more than 2 percentage points.

The fund's strong performance can be attributed to its well-executed succession plan and experienced management team. Lead manager Jean Hayes has managed the fund since 2008, and the fund's advisor, Wellington Management, is known for its successful track record with Vanguard's actively managed funds.

In summary, the Vanguard Health Care Fund offers a compelling combination of low fees and strong performance, making it a competitive choice for investors seeking exposure to the healthcare sector.

Investment strategy

The Vanguard Health Care Fund is a mutual fund that falls within Morningstar's health category. The fund's investment strategy is focused on investing principally in the equity securities of companies in the healthcare industry. This includes investing in stocks in the health and medical fields, such as pharmaceutical companies, HMOs, and medical device makers. The fund offers exposure to both domestic and foreign companies within this sector.

The fund's investment strategy can be characterized as a proven, less risky approach in an increasingly volatile sector. It offers a value-leaning approach, low fees, and an experienced management team. The fund's expense ratio is relatively low at 0.34% to 0.37%, and it requires a minimum initial investment of $3,000.

The fund's investment strategy is implemented by outside subadvisor Wellington Management, with lead manager Jean Hayes managing the fund since 2008. The fund takes a broad approach to healthcare investing, including investing in various sectors both in the U.S. and abroad. Pharmaceutical stocks typically make up the biggest chunk of the portfolio, but the fund also invests in biotech, healthcare equipment, health insurers, and other industries.

The fund's investment strategy can be described as a buy-and-hold approach, which tends to produce average returns compared to its peers but with a below-average risk profile. This strategy has resulted in strong long-term performance, with the fund outperforming the S&P 500 and delivering market-beating returns over long bull stretches.

Overall, the Vanguard Health Care Fund's investment strategy can be summarized as a well-executed, low-cost approach to investing in the healthcare sector, offering investors a combination of active management at an index fund price.

Risk and volatility

When considering investing in the Vanguard Health Care Fund, it is important to assess the associated risks and volatility.

The Vanguard Health Care Fund is considered a relatively low-risk investment option within its sector. Morningstar categorises it as a "proven, less risky approach in an increasingly volatile sector". This is due to its value-leaning approach, low fees, and experienced management team. The fund's risk is considered low compared to other funds in its Morningstar peer group for the trailing three-, five-, and 10-year periods.

However, it is important to note that investing in stocks, especially in the healthcare sector, carries inherent risks. These include market and individual security risks, as well as risks associated with investing in companies based outside the US, such as political and economic issues and fluctuations in foreign currencies. Additionally, focusing on a single sector, like healthcare, carries the added risk of concentration in a specific market segment.

The fund's volatility, or the uncertainty or risk of change in the value of its securities, should also be considered. While the fund has exhibited below-average risk compared to its peers, it is important to analyse its historical performance. For instance, as of November 27, 2023, the fund had returned -1.66% over the past year, 5.59% over three years, 7.38% over five years, and 9.69% over the past decade.

Compared to its peers, the fund's 10-year average annual return of 14.9% is slightly lower but still impressive when compared to the S&P 500's average. This return has also been achieved with less volatility, making it a more stable investment option within the healthcare sector.

In summary, while the Vanguard Health Care Fund is considered a lower-risk option within its sector, investing in any stock or sector fund carries inherent risks and potential volatility. It is essential to assess your risk tolerance, conduct thorough research, and consider the fund's historical performance before making any investment decisions.

Fund size and assets

The Vanguard Health Care Fund is a large fund, with assets under management of $48.7 billion as of October 2024. This is an increase from the $42.77 billion in assets reported in November 2023. The fund has 126 different holdings and requires a minimum initial purchase of $3,000. The Admiral share class version of the fund requires a higher minimum investment of $50,000 but offers a lower expense ratio of 0.32%.

The Vanguard Health Care Fund's expense ratio is 0.34% to 0.37%, which is considered low for funds in this category. The fund's net expense ratio is 0.35%, and its distribution fee level is low. The fund's investment style is large growth, and it falls within Morningstar's health category.

The fund's large size and low fees are attractive features for investors considering investing in the healthcare sector. The fund's performance has been strong, with a 10-year average annual return of 14.9%, outperforming the S&P 500's 13.6% average. The fund's risk is also considered low compared to other funds in its category, making it a relatively stable investment option in the healthcare sector.

Management team

The Vanguard Health Care Fund is managed by outside subadvisor Wellington Management. The lead manager, Jean Hynes, has managed the fund since 2008. However, it was announced in August 2024 that she would be stepping down in January 2025. Hynes has had a long and distinguished career in the healthcare sector, having served as a portfolio manager on the Health Care Fund since 2008. During her tenure, the fund has outperformed its benchmark by more than 1.6% per year, and fund assets have doubled from $23 billion to $48 billion as of June 30, 2024.

Hynes will be succeeded by Rebecca Sykes, who has worked closely with her since joining Wellington Management’s Health Care Team in 2007. Sykes is a Global Industry Analyst and health care portfolio manager, and team leader for Wellington’s 15-person Health Care sector research team. She holds an M.B.A. from the Wharton School and a B.S. in economics, finance, and healthcare management from the University of Pennsylvania, where she graduated magna cum laude. She is also a Chartered Financial Analyst and a member of the CFA Institute.

The Vanguard Health Care Fund has been praised for its experienced management team, and its well-executed succession plan is expected to position the fund for continued success.

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