An ETF is a fund that trades like stock shares on an exchange and tracks an index, bond, commodity, or another fund. ETFs are different from mutual funds in that they are traded on an exchange throughout the day at different prices and have higher liquidity and lower fees.
The Healthcare Select Sector SPDR ETF (or XLV) provides exposure of approximately 16% to the medical device industry. However, investors seeking more targeted exposure to the industry can invest in US medical device industry ETFs as we discussed previously in the series.
The iShares U.S. Medical Devices ETF
The iShares U.S. Medical Devices ETF (IHI) was established in 2006 and tracks the Dow Jones U.S. Select Medical Equipment Index, which has exposure to the US medical device industry. IHI is a broadly diversified fund that comprises of 50 companies with approximately 65% allocation to large market cap companies while the rest is allocated to small and medium companies.
The top five holdings of the iShares U.S. Medical Devices ETF are Medtronic (MDT), Abbott Laboratories (ABT), Thermo Fisher Scientific (TMO), Becton Dickinson (BDX), and Stryker with a combined allocation of around 45.8%.
The SPDR S&P Health Care Equipment ETF
The SPDR S&P Health Care Equipment ETF (XHE) is a relatively new fund established in 2011 and tracks the S&P Health Care Equipment Select Industry Index, an equal-weighted index of US medical device companies. It is a thinly traded ETF with significant exposure to niche companies in the medical device industry.
Investors seeking equivalent exposure to emerging high tech companies with substantial risk as well as large players with minimal risk can invest in the XHE ETF, as it is composed of SMEs as well as big players with equal-weighed exposure across market capitalizations.
The top five holdings of the SPDR S&P Health Care Equipment ETF are NxStage Medical, Natus Medical Incorporated, Align Technology, STERIS, and DENTSPLY International with a ~10% combined allocation.