Choosing what type of small cap fund to invest in can be a bit daunting at first, there seems to be an endless list of funds out there, specializing in everything from technology to green energy.
But whilst it’s technology that seems to get all the limelight, (hardly surprising since technology companies are responsible for some of the biggest gains over the last decade), health care has also shown strong growth over the last 10 years but as a sector it’s often overlooked by the investment glitterati.
In this article we’ll take a closer look at the health care market and show you why you might want to consider adding a health care small cap mutual fund to your investment portfolio.
Health Care is a Safe Harbor
It’s a fact that no matter what the economy is doing people still get sick and none of us are getting any younger. As a result, health care remains a constant.
Health Care small cap mutual funds invest in anything remotely related to health care. The companies represented in the portfolios of Health Care funds range from pharmaceuticals and hospitals to companies providing specialized services to health care providers such as hospital cleaners and home care providers.
Pharmaceuticals often make up the majority of holdings in these types of funds, closely followed by hospitals and other specialist health care facilities. Then you’ll find varying amounts of general hospital equipment, specialized diagnostic equipment, software, health insurance, etc. They also invest in companies that specialize in developing new therapies, many of which would fall into the biotechnology sub-sector.
Health Care Costs Never Go Down
The interest in the health care sector stems from three major factors: As our population ages and life expectancies lengthen, there’ll be an increased demand for health care and associated services.
Secondly the demand for health care is relatively stable and thus provides a hedge against the frequent ups and downs of the investment market.
And finally the cost of health care is rising much faster than inflation, which translates into greater profitability in the health care sector. It also makes health care a candidate for a hedge against inflation, or at least that portion of it attributable to disproportionate increases in the cost of health care.
So there are many good reasons to invest in health care mutual funds. But do the historical returns bear this out? Well, although the health care sector’s 10-year average return was nearly twice that of the S&P 500, it should be pointed out that the last 10 years was an unusually bad period for the S&P 500.
The sector’s 5-year return was about the same as the S&P 500 in both absolute and risk-adjusted returns. There are, however, some funds that have consistently outperformed the market, both in absolute and risk-adjusted terms, over the past 10 years. If you decide to add a Health Care fund to your portfolio, be sure to pick one whose long-term performance identifies it as a probable winner going forward.
Investing in health care small cap funds is definitely not sexy, but it’s a safe reliable investment, especially in the current climate. Going forward if you pick the right fund you should be able to match the performance of the S&P 500 over the long term. You might say, why not just invest in the S&P 500 then?
Well if you do that you’ll be missing out on the all the fun of investing in small caps. What if a small pharmaceuticals company creates a new wonder drug, what if a small medical equipment company invents a new more cost efficient MRI scanner? Then you’ll be missing out on a huge payday.
If you want to start investing in health care small cap funds, take a look at OptionsHouse, they’ll give you access to all the latest fund performance results so you can make an educated selection. On top of that you’ll also get 100 free trades if you’re a new customer.