Analyzing the Performance and Diversification Benefits of Healthcare Exchange Traded Funds

This article analyzes the performance of healthcare exchange traded funds (ETFs) based on monthly returns observed from January 2000 to August 2022. Our research uncovers a robust positive correlation between average monthly returns of healthcare ETFs (HETF), the Dow Jones Healthcare sector, and the S&P 500 index, indicating their synchronized movements with these benchmarks. Consequently, US investors with significant equity holdings in domestic markets may find limited diversification advantages in healthcare ETFs. Furthermore, our analysis demonstrates that healthcare ETFs have the potential to deliver superior risk-adjusted returns compared to the broader US equities market, although they may not consistently outperform specific healthcare indexes. Importantly, the excess returns (alpha) observed in healthcare ETFs cannot be attributed to portfolio manager skill or information advantages. Statistically, these alphas remained insignificant across most of the study period, suggesting the influence of external factors like luck or market conditions on these excess returns. The article also finds that monthly excess returns of HETFs maintain significant exposure to the stock market. While diversification can aid in risk reduction, it also implies that these funds cannot entirely evade the volatility associated with the stock market.