How to Invest in the Healthcare Sector

Key Points

• The healthcare sector represents both a consistent consumer need and a source of risk for investors. 
• Stocks, ETFs, mutual funds and REITs all represent the different sectors of the healthcare sphere.
• Consider all options, which can provide a wide range of choices to manage risk level and dividend returns.

As the world economy recovers from the COVID-19 pandemic, more and more investors are interested in learning how to invest in the healthcare sector. While there are multiple ways to invest in the U.S. healthcare industry, buying stocks or funds associated with these companies is the easiest method. As many major healthcare providers operate on exchanges like the New York Stock Exchange or the NASDAQ, getting started as a healthcare investor can be as simple as placing a "buy" order. 

There are multiple ways to invest in the healthcare industry, and the best way to invest in healthcare might vary depending on your goals. Read on to learn more about the healthcare industry and how it operates, explore some of the top-rated biotech stocks on MarketBeat and expand your portfolio with medical assets. 

Overview of the Healthcare Sector 

The healthcare industry in the United States is one of the largest and most complex in the world. The healthcare sector involves a wide web of pharmaceutical companies, healthcare providers and regulators working together to ensure that all treatments are safe and effective. The industry is characterized by high costs, rapid technological advancements and ongoing regulatory changes, all of which may concern investors. 

Investors play a significant role in the healthcare industry, as they provide funding for the research and development of new treatments and the acquisition of companies and technologies. Venture capitalists, private equity firms and institutional investors are all active in the healthcare space, seeking to invest in companies with innovative technologies and promising growth prospects. Drug patents, in particular, play a major role in investment opportunities within the sector, with many of the best pharmaceutical stocks in 2023 and the best healthcare stocks to buy right now showcasing growth stock benefits. 

While the healthcare industry offers an ever-present market and wide range of opportunities, it also comes with unique risks. Healthcare investing can be risky due to the high research and development costs, the lengthy regulatory approval process and the potential for unforeseen complications in clinical trials. For example, a pharmaceutical company might spend millions of dollars researching a new drug only to have it fail FDA trials. This failure can result in drastic drops in share price and investor loss. 

Why Invest in the Healthcare Sector?

The primary reason investors are attracted to the healthcare industry is everlasting demand. The need for medical care drives the healthcare sector, which should increase as the population ages and chronic diseases become more prevalent. As such, the sector is relatively insulated from economic downturns and may offer more consistent and stable long-term growth.

Healthcare companies are constantly developing new treatments, drugs and medical technologies, which can lead to significant breakthroughs and create opportunities for investors to profit, such as in the case of telemedicine stocks. Additionally, many healthcare companies receive government funding for research and development, which can offset some risks associated with investing in new and untested products.

Ways to Invest in the Healthcare Sector

The United States healthcare industry is vast and includes multiple sectors investors can support. The following are some of the major components of the healthcare sector you should be familiar with before investing in the healthcare sector.

Pharmaceuticals

Pharmaceutical companies research, develop, manufacture and market drugs and medications. Most pharmaceutical companies invest heavily in the discovery and development of new medicines, as well as the production and distribution of existing drugs.

Developing a new drug typically involves several stages, including basic research, preclinical testing, clinical trials and regulatory approval. Pharmaceutical companies play a key role in the healthcare sector by funding these processes to bring new drugs to market and ensure their success.

Biotech

Biotech, or biotechnology companies, use biological and chemical processes to develop products and technologies that improve human health. These companies use living organisms or their derivatives to create new technologies and therapies that can help solve complex problems and meet the needs of society.

Some examples of products produced by biotech firms include genetically modified organisms (GMOs) and immunotherapies for cancer patients. Like pharmaceutical companies, biotech companies must undergo a strict regulatory process before seeing products approved and on the open market. This regulatory approval system makes it especially important for investors to focus on histories of success and viabilities of upcoming drugs when learning to invest in healthcare stocks.

Medical Equipment

Medical equipment companies design, manufacture and distribute a wide range of medical devices and equipment used by healthcare providers to diagnose, treat and monitor patients. These companies produce everything from simple instruments, such as thermometers and blood pressure monitors, to complex imaging equipment like MRI machines and ultrasound scanners. They also often work with hospitals and healthcare providers to develop new diagnostic and movement assistance devices. 

Sales and Distribution

Medical sales and distribution companies act as intermediaries between manufacturers of medical products and healthcare providers, facilitating the supply chain for medical products. Medical sales and distribution companies play a crucial role in the healthcare industry by ensuring that medical products and equipment are readily available to healthcare providers when needed. They work closely with manufacturers to understand product specifications and regulatory requirements and then market and distribute these products to healthcare providers.

Insurance

Health insurance companies cover individuals and groups to help pay for healthcare expenses. These companies collect premiums from policyholders, covering the costs of medical services and treatments. Health insurance companies are important in the United States due to the country's high consumer costs for medical care series. 

Healthcare Facilities

In addition to insurance companies and the companies that provide and produce medical services, you can also invest in the physical spaces that healthcare providers use to distribute services. Commercial real estate investment trusts (REITs) specialize in managing and financing real estate operations on behalf of commercial operations (like hospitals). If you're interested in learning how to invest in a hospital rather than its operations, a REIT might be the best choice. 

How to Invest in the Healthcare Sector 

Investing in the healthcare sector usually involves buying and selling shares of stock issued by healthcare companies. The specific process you'll go through when investing varies depending on the type of asset you're buying, but you can expect the following basic steps. 

Step 1: Open a brokerage account.

A brokerage account is an investment account that you'll use to communicate with your broker to buy and sell stocks, funds and other assets. Most items on MarketBeat's best medical stocks list trade on major exchanges, so you can start buying and selling immediately if you already have a brokerage account. However, if you're interested in investing in a healthcare mutual fund, you may need to use an IRA or specialized retirement account. 

If you still need a brokerage account, open one before moving forward. Some popular examples of online brokers include Robinhood, E*TRADE and Charles Schwab. You must also link and confirm a bank account to fund your account before placing an order. 

Step 2: Place a "buy" order.

Locate the asset you want to buy by searching for its ticker. For example, if you want to know how to invest in healthcare stocks, you place a buy order, specifying how many shares you'd like to purchase and how much you'd like to spend. Place a limit order if you want to buy the asset at a specific price. If the speed of execution is more important to you than the individual price paid per share, you may prefer a market order. 

Step 3: Monitor your investment.

The healthcare industry constantly changes as innovations change how we treat common diseases and ailments. Monitor your investment over time and track how its value is changing. If you're employing a short-term trading strategy, you may also want to place a stop-loss order to limit your financial loss in case your investment dips in value. 

Types of Healthcare Investments to Consider 

Multiple types of assets can provide you with exposure to the healthcare sector. Consider adding a mix of the following investment types to your portfolio for enhanced diversification. 

Healthcare Stocks

The healthcare industry makes up a wide web of publicly traded companies in both the development and service sides of the business. Healthcare stocks can offer investors exposure to the growing demand for healthcare services and products and the potential for strong financial performance driven by innovation, regulatory approvals and demographic trends. However, healthcare stocks can also be subject to regulatory risks, clinical trial failures and other industry-specific challenges that can impact their performance. 

Examples of healthcare stocks include Johnson & Johnson NYSE: JNJ and UnitedHealth Group Inc. NYSE: UNH. Browse a list of the best pharmaceutical stocks on MarketBeat, which you can use to complement both general portfolios and healthcare-based investor profiles. 

Mutual Funds

A healthcare mutual fund is a type of investment fund that pools money from investors to invest in various healthcare-related stocks or other securities. A professional fund manager manages the fund and seeks to provide a return for the investors by investing in healthcare companies that they believe have the potential for growth and financial performance. Some examples of healthcare mutual funds include the Vanguard Health Care Fund (VGHCX) and the Fidelity Select Medical Technology and Devices Portfolio (FSMEX).

ETFs

An exchange-traded fund (ETF) is an investment fund that allows investors to buy ownership in a pool of themed stocks selected by fund managers. Healthcare ETFs consist of assets within the healthcare industry, including stocks, REITs and additional investments. These funds provide an instant level of diversification within the healthcare industry and trade like normal shares of stock throughout the day. Examples of healthcare ETFs include the iShares Global Healthcare ETF NYSE: IXJ and the Vanguard Health Care ETF NYSE: VHT.

Learn more about the five best healthcare sector ETFs.

REITs

REITs trade on major exchanges using the same processes as stocks and ETFs. Companies structured as REITs must distribute at least 90% of their taxable income back to shareholders in the form of dividends. This clause can make healthcare REITs ideal for income investors, with multiple REITs included in MarketBeat's list of healthcare stocks with dividend increases and healthcare dividend stocks recommendations. 

Pros and Cons of Investing in Healthcare

While the healthcare industry provides products and services in consistent demand, regulations and failed trials may increase the risk taken on by investors in this sector. 

Pros

There are several benefits to investing in healthcare that you may want to consider, including the following:

• Growing demand: The healthcare industry has a growing demand for products and services due to demographic trends, including an aging population of baby boomers and rising levels of chronic illness (like heart disease and obesity-related conditions). 
• Innovation potential: Healthcare companies invest heavily in research and development, and medical technology or treatment breakthroughs can lead to significant financial gains. The sector has growth stock opportunities, which may appeal to active investors. 
• Resilience: Healthcare is usually considered a defensive industry that can be more resilient to economic downturns or recessions.

Cons 

What are the potential downsides? Take a look:

• Clinical trial failures: Healthcare companies often invest significant amounts of money in clinical trials, which can lead to significant financial losses for both companies and investors. 
• Regulatory risks: Healthcare companies are subject to strict regulatory oversight, and changes in regulations or unexpected regulatory decisions can impact each stock's financial performance.

Future of Healthcare Investing

It might be worth considering learning how to invest in healthcare industry into the future. An aging population should fuel increased demand for healthcare services in 2023 and beyond. In particular, many healthcare companies are researching biometric therapies and personalized treatments customized using the patient's unique genetic makeup. While these companies may present investor opportunities, growing regulatory concern amid rising healthcare pricing may lead to legal and political shifts that can influence the pricing of healthcare assets. 

Consider Investing in the Healthcare Sector

Investors considering entering the healthcare market should know that despite the constant demand for healthcare services, these assets may be more volatile than other consumer staples. Many healthcare companies devote large percentages of their budgets to research and development, which leads to sharp losses if trials are unsuccessful. If you decide to invest in the healthcare industry, diversify across multiple portions of the industry using a variety of stocks, an ETF investment or the best health mutual funds on the market. 

Still wondering about how to invest in healthcare? Consider investing in cancer stocks.

FAQs

Let’s look at some lingering questions you may have about healthcare investing. 

Is the healthcare sector a good investment?

Healthcare is an essential industry that will continue to grow as the global population increases and ages. Additionally, advances in medical technology and increasing demand for healthcare services may drive growth in the sector, making it an appealing choice for investors. However, risks associated with political changes and regulatory approval may lead to losses. 

How can I invest in the medical field?

There are various ways to invest in the medical field, including buying shares of stocks directly or through an ETF. If you're investing through a retirement account, you may have the opportunity to pool money with other investors using a mutual fund. A total market index fund or S&P 500 index fund can also provide exposure to some of the largest healthcare companies and investing in healthcare sector. 

What is the best healthcare ETF?

The best ETF for your portfolio will vary depending on your unique risk tolerance and exposure preferences. The largest healthcare ETFs include the Health Care Select Sector SPDR Fund NYSE: XLV and the iShares U.S. Healthcare ETF NYSE: IYH.