7 ETFs to Invest in the Next Generation of Health Care

Jeff Reeves

Investors can find health care's future.

Health care stock is a popular class of investment for a number of reasons. The sector is largely recession-proof, and thanks to long-term shifts in demographics, there are simply more customers for health care companies as people around the world live longer. But not all health care stocks are created equal. Many entrenched pharmaceutical companies face patent expirations. Hospitals and insurers are under pressure as politicians focus on the ever-increasing cost of care and inefficiencies in Medicare. To really invest in the large potential of modern medicine, then, you need to look beyond typical blue-chips. These seven exchange-traded funds put a more innovative bent on the sector to focus on the future of health care.

iShares Nasdaq Biotechnology ETF (ticker: IBB)

At roughly $7 billion in assets, this iShares fund is a popular way to play health care in a more forward-looking way. Instead of a broad health care fund that includes sleepy large pharma stocks, IBB is focused on the newer drugmakers developing the next generation cures. These include larger and well-known biotechs like Amgen (AMGN) and Gilead Sciences (GILD) as well as small, up-and-coming players that are very much focused on research and don't have much revenue to speak of yet. This balance of established players and aggressive small-caps helps smooth out some of the risks across a portfolio of about 220 stocks that make up this ETF.

ARK Genomic Revolution ETF (ARKG)

Biotechnology stocks use next-generation techniques to research previously elusive cures. And one specific subsector of biotechnology that is increasingly in focus is genomics -- that is, gene editing and related therapies that involve changing the very DNA of organisms to fight diseases both large and small. Federal regulators have already approved a number of gene-editing procedures, including in rare cases of pediatric cancer where there is no other viable treatment. ARKG is a way to get a share of those medical companies researching similar cures, as well as the related technology and lab equipment providers that fuel this highly technical but high-potential industry.

SPDR S&P Health Care Equipment ETF (XHE)

Another interesting angle for investors looking to play future leaders in health care is to look beyond drugs and focus on the increasingly high-tech equipment of the health care sector. That's what XHE does with components that include Nevro Corp. (NVRO), which makes products to help fight back pain, and diabetes care provider Insulet Corp. (PODD), which provides insulin delivery devices. Modern medicine is amazing, and plenty of research goes into things other than pills and chemical compounds. XHE is a good way to play that trend in a diversified way across nearly 70 equipment-focused players.

Global X Longevity Thematic ETF (LNGR)

This Global X fund is an interesting play on the demographic trend of people living longer than ever before -- and as a result, an increase in demand for medical care for the kinds of conditions that are common in old age, such as arthritis or heart disease. LNGR holds about 100 health care stocks you likely will recognize, including pharmaceutical giant Bristol-Myers Squibb Co. (BMY) as well as less obvious plays like senior housing operator Welltower (WELL). The common thread in this ETF is a focus on the kinds of care that older Americans rely on, and will surely need more of in the future.

iShares Global Healthcare ETF (IXJ)

Of course, the wolrd is a great big place and there are lots of sick people outside the U.S. -- with lots of companies researching cures and providing 21st century care. IXJ acknowledges this with a truly global approach to health care. The iShares fund tends to be a bit more centered on larger stocks, including U.S. mega-cap Johnson & Johnson (JNJ) as well as established European players like Novartis AG (NVS) and Roche Holding (RHBBY). However, the 100-plus holdings are a who's who of global health care and the fund is a great way to ensure you have a stake in the future leaders of the sector regardless of where the companies are headquartered.

Invesco S&P SmallCap Health Care ETF (PSCH)

If you are less concerned about geography and simply want to be sure to have a stake in smaller stocks that could grow rapidly and deliver outsized returns, then consider this Invesco fund that is focused on stocks of only a few billion dollars in market capitalization or less. The promise of these kind of small-cap health care stocks is exhibited in one of PSCH's top holdings Repligen Corp. (RGEN), a company that specializes in proteins, resins and cell culture media for biotechnology treatments. This stock has soared about 70% in the last 12 months while the S&P 500 is more or less flat.

First Trust Health Care AlphaDEX Fund (FXH)

Not all small stocks are destined to succeed in health care, however. So rather than a screening system based simply on size, this First Trust fund deploys a quantitative methodology to identify the picks in the sector that are seeing the momentum, sales growth or other metrics when compared with their peers -- and thus are set up for future outperformance, too. Top holdings at present include diabetes care company DexCom (DXCM), which has soared more than 50% in the last 90 days. That's the kind of fast-moving pick this fund tries to tap into to provide outsized returns and ensure it's invested in the future leaders of health care.

ETFs to invest in the next generation of health care:

-- iShares Nasdaq Biotechnology ETF (IBB)

-- ARK Genomic Revolution ETF (ARKG)

-- SPDR S&P Health Care Equipment ETF (XHE)

-- Global X Longevity Thematic ETF (LNGR)

-- iShares Global Healthcare ETF (IXJ)

-- Invesco S&P SmallCap Health Care ETF (PSCH)

-- First Trust Health Care AlphaDEX Fund (FXH)