What Is a Healthcare ETF? Everything You Need to Know

Q: What is a healthcare ETF and how does it differ from individual healthcare stocks?

A healthcare ETF is an exchange-traded fund that invests in healthcare companies listed on an index. Learn about its meaning types and benefits

Posted On: 24 February 2025

The healthcare sector is considered a defensive sector – one that has some demand even during downturns and volatility. After all, healthcare services are essential, regardless of market conditions.
This is why healthcare is a suitable investment avenue, and many investors choose to allocate a part of their portfolio to this sector to potentially provide a cushion during volatility. One such way of investing in the healthcare sector is through a Healthcare Exchange-traded Fund (ETFs). Let’s explore the healthcare ETF meaning, how to invest in healthcare ETFs, and the benefits and risks of this avenue.

Table of contents

What is a healthcare ETF?
Types of healthcare ETFs in India
What are the benefits of investing in healthcare ETFs?
What are the risks of investing in healthcare ETFs?
Key Factors to Consider Before Investing in Healthcare ETFs
How to invest in a healthcare ETF?
Comparison Table: Healthcare ETF vs Pharma ETF vs Individual Stocks

What is a healthcare ETF?

A healthcare ETF is an investment fund that pools money from multiple investors to buy a diversified portfolio of healthcare-related stocks. ETFs are passively managed, meaning that the portfolio replicates that of a benchmark index and aims to replicate its performance (subject to a tracking error). Two of the main indices that healthcare ETFs typically track are the Nifty Healthcare Index and the BSE Healthcare Index. These indices, in turn, are composed of top-performing companies operating in various segments of the healthcare sector, such as pharmaceuticals, biotechnology, healthcare services, and medical equipment manufacturers etc.

Healthcare ETFs trade on stock exchanges like individual stocks, allowing for intraday trading.

Types of healthcare ETFs in India

Broad-based healthcare ETFs: These ETFs track indices that comprise companies across the healthcare spectrum. Such indices may include pharmaceutical companies, hospitals, diagnostics firms, and healthcare equipment manufacturers and more. They offer exposure across the healthcare value chain.
Pharmaceutical-focused ETFs: Some ETFs concentrate primarily on pharmaceutical and biotechnology companies. These funds may include manufacturers of generic drugs, active pharmaceutical ingredients (APIs), and companies engaged in research and development. The pharmaceutical segment forms a significant portion of India's healthcare exports.

What are the benefits of investing in healthcare ETFs?

Here are some advantages of investing in healthcare ETFs

Exposure to many subsectors: Healthcare ETFs provide exposure to a range of companies and subsectors within the healthcare industry including pharmaceuticals, biotechnology and medical equipment manufacturers in addition to healthcare service providers. This reduces the risk associated with investing in individual healthcare stocks.
Growth potential: The healthcare industry in India is poised for potential long-term growth due to factors such as an aging population, increasing healthcare awareness, government spending on health infrastructure, contract research and manufacturing opportunities and rising medical expenses.
Lower volatility during economic downturns: The healthcare sector tends to be experience lower volatility* than the broad market during economic downturns, as medical services remain essential regardless of economic conditions.
*Past performance may or may not be sustained in the future
Easy to buy and sell: Since healthcare ETFs are traded on stock exchanges, they are easy to buy and sell. They also typically have lower expense ratios compared to actively managed mutual funds.

What are the risks of investing in healthcare ETFs?

Now that you know the healthcare ETF meaning and the benefits of investing in the suitable healthcare ETFs, you must understand the risks associated with investing in them:

Regulatory risks: The Indian healthcare industry is heavily regulated, and changes in policies, such as drug pricing reforms or healthcare legislation can affect markets.
Market volatility: Even though healthcare is a defensive sector, stock prices can fluctuate, especially in the short term.
Company-specific risks: If a major company within the ETF faces issues such as failed drug trials, lawsuits, or regulatory scrutiny, it can negatively impact the ETF’s overall performance.
Global events: Geopolitical events such as wars, uncertainty, currency fluctuations and other crises can create uncertainty, causing short-term market volatility.
Concentration risk: Healthcare ETFs are concentrated on a single sector and any sector-specific risk can significantly affect your portfolio. Additionally, the sector may not always outperform the broad market.

Key Factors to Consider Before Investing in Healthcare ETFs

Sector concentration risk: Healthcare ETFs focus exclusively on one sector, leading to concentrated exposure. Unlike diversified equity funds, these ETFs lack cross-sector diversification, which may amplify volatility during sector-specific downturns. Regulatory changes, pricing pressures, or policy shifts affecting healthcare companies could impact the entire portfolio.

Underlying index composition: Understanding which index the ETF tracks is essential. Different indices may have varying compositions and stock weightages.

Tracking error: ETFs aim to replicate their underlying index performance, but tracking error (the difference between ETF returns and index return) may occur due to management expenses, rebalancing costs, or imperfect replication.

Liquidity considerations: Trading volume and liquidity of the ETF influence how easily units may be bought or sold without significant price impact. Lower liquidity could result in wider bid-ask spreads, potentially affecting transaction costs.

Expense ratio: While ETFs generally have lower expense ratios compared to actively managed funds, comparing costs across similar healthcare ETFs remains important as expenses directly impact net returns over time.

How to invest in a healthcare ETF?

Here are the steps you need to follow to invest in the suitable healthcare ETFs:

Step 1: Open a brokerage account that offers access.
Step 2: Compare different ETFs based on their expense ratios, historical performance, holdings, etc.
Step 3: Invest in your chosen healthcare ETF.
Step 4: Monitor your investment regularly to review your portfolio.

Comparison Table: Healthcare ETF vs Pharma ETF vs Individual Stocks

Feature	Healthcare ETF	Pharma ETF	Individual Stocks (Healthcare/Pharma)
Definition	An Exchange Traded Fund (ETF) that invests in a diversified portfolio of companies across the broader healthcare sector, including pharmaceuticals, hospitals, diagnostics, medical equipment, and allied services.	An ETF specifically focused on companies primarily engaged in the research, development, manufacturing, and distribution of pharmaceutical drugs and related products. It's a sub-segment of the broader healthcare sector.	Direct ownership of shares in a publicly listed company or companies within the healthcare or pharmaceutical industry.
Diversification	Invests in various sub-sectors within healthcare, potentially reducing the impact of underperformance in one sub-sector. However, the portfolio is concentrated compared to broad market funds.	Provides diversification within the pharmaceutical segment, mitigating company-specific risks to some extent. However, it remains concentrated within one specific industry.	No diversification if your investment is concentrated in one company. Performance is solely dependent on that company's success or failure.
Risk Profile & volatility	Requires a high risk appetite, as it is a sector-specific investment. However, due to diversification across sub-sectors, it can be relatively less volatile than individual stocks within the sector.	Requires a high risk appetite, as it is a highly concentrated sector-specific investment. Can be susceptible to specific regulatory changes affecting the pharma industry	Requires an even higher risk appetite due to concentrated exposure. Company-specific events (e.g., failed clinical trials, regulatory setbacks, competition) can lead to significant capital fluctuations.
Potential Returns	Potential for market-linked returns mirroring the overall healthcare sector's growth. Returns are typically aligned with the performance of the underlying index.	Potential for market-linked returns reflecting the performance of the pharmaceutical industry.	Potential for higher returns if the chosen company performs exceptionally well. However, this also comes with the potential for significant losses.
Expense Ratio & Cost	Involves an expense ratio (TER) which is an annual fee. Lower expense ratios compared to actively managed mutual funds.	Similar to Healthcare ETFs, it involves an expense ratio.	Primarily involves brokerage charges for buying and selling.
Management	Fund manager handles the portfolio and minimum intervention is required by the individual investor.	Fund manager handles the portfolio and minimum intervention is required by the individual investor.	Requires active research, analysis, and continuous monitoring by the investor. This demands significant time and expertise. Highly variable liquidity depending on the company's market capitalization and trading volume

Conclusion:

Healthcare ETFs can provide a convenient way to gain exposure to one of the most essential and growing sectors of the Indian economy. While investing in healthcare ETFs presents several opportunities, it is essential to be aware of the associated risks and conduct thorough research before investing.

FAQs:

What is a healthcare ETF and how does it differ from individual healthcare stocks?

A healthcare ETF invests in a diversified portfolio of healthcare stocks, offering broader sector exposure. Individual healthcare stocks represent a single company. Investing in individual stocks carries a higher risk.

What are the different types of Healthcare ETFs?

Healthcare ETFs in India commonly track either the Nifty Healthcare Index or the BSE Healthcare Index.

What are the advantages of investing in Healthcare ETFs?

Investing in healthcare ETFs offers long-term growth potential, exposure to several companies within the healthcare sector and cost-effectiveness compared to actively managed mutual funds. The healthcare sector can also potentially offer lower downside risk during volatility and downturns.

How can I invest in healthcare ETFs?

You need to open a brokerage account, choose an ETF, and then put in the trade order to invest in healthcare ETFs.

What are the potential risks of investing in Healthcare ETFs?

Potential risks of investing in Healthcare ETFs include concentration risk, sector-specific risks, regulatory changes, market volatility, technological disruptions and global crises. These factors can impact stock prices and overall ETF performance in India.

What costs are involved when investing in healthcare ETFs?

Healthcare ETFs involve expenses such as the TER charged by the fund, brokerage costs during buying or selling, and the impact of bid–ask spreads on execution. These costs influence overall returns. Investors may review scheme documents, compare TERs within the category, and assess liquidity before deciding suitability for their portfolios.

Are healthcare ETFs taxable, and what are the tax implications?

Healthcare ETFs are considered equity funds for tax purposes. Gains from holdings less than 12 months are taxed at a flat rate of 20%. Gains from holdings 12 months and above are exempted from taxation up to Rs 1.25 lakh. Gains above this limit are taxed at 12.5%.

How liquid are healthcare ETFs compared to other mutual funds?

Liquidity for healthcare ETFs depends on trading volumes and market depth, while mutual funds offer end-of-day NAV-based transactions. ETFs may experience wider bid–ask spreads during low activity.

Can healthcare ETFs be a good option for long-term investment?

Healthcare ETFs may be suitable for investors seeking long-term exposure to the healthcare theme with equity-linked volatility. They track healthcare indices and may offer potential long-term growth opportunities, though outcomes depend on sector performance. Investors may review risk appetite, theme concentration, and diversification needs before deciding whether such exposure aligns with their goals.

How do healthcare ETFs perform during market downturns?

Healthcare ETFs reflect the performance of the underlying healthcare index, which may behave differently across downturns. Some periods might continue to show demand for healthcare essential services, while others may experience volatility similar to broader equities. Outcomes depend on sector fundamentals and market conditions. Investors may treat healthcare ETFs as very high-risk equity exposure requiring long horizons.

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