FHLC: A Diversified, Low-Cost Healthcare Play Amid Sector Volatility

The healthcare sector has long been a haven for investors seeking stability and growth, but its recent volatility—driven by regulatory shifts, pricing pressures, and macroeconomic uncertainty—has made selecting the right exposure critical. Enter the Fidelity MSCI Health Care Index ETF (FHLC), which combines broad diversification, a razor-thin expense ratio, and strategic sector weighting to position itself as a compelling core holding for investors. Let's unpack how FHLC stacks up against rivals like the Health Care Select Sector SPDR Fund (XLV) and iShares U.S. Healthcare ETF (VHT), and whether its strengths outweigh its risks.

Portfolio Construction: 400+ Holdings for Balance

FHLC's cornerstone is its broad diversification, tracking the MSCI USA IMI Health Care 25/50 Index, which holds over 400 healthcare stocks. This contrasts sharply with XLV's narrower 39-holding focus and VHT's 100+ holdings. FHLC's expansive portfolio mitigates overexposure to individual companies while maintaining a focus on large-cap giants (89% of assets) like Eli Lilly (11.5%), UnitedHealth Group (8.1%), and Johnson & Johnson (6.2%). Yet it also allocates 7.5% to mid-cap firms and smaller stakes in emerging players, offering a balance between stability and growth.

This structure addresses a key weakness of many healthcare ETFs: reliance on a handful of stocks. For instance, XLV's top five holdings represent nearly 30% of its assets, while FHLC's top five are capped at 31.6%. The result? Reduced volatility and a smoother ride during sector dips.

Cost Advantage: 0.08% vs. Peers' Higher Fees

FHLC's expense ratio of 0.08% is a standout feature. While XLV matches this rate, VHT charges 0.12%, and the category average hovers around 0.52%. Over time, these savings compound significantly. For example, on a $10,000 investment over 10 years, FHLC's fees would cost $80 annually, versus $120 for VHT—a difference of $400 over a decade.

The cost edge is especially valuable in a sector where active management fees often eat into returns. FHLC's passive indexing approach ensures investors pay only for exposure, not for underperforming stock-picking.

Performance: Outpacing Peers YTD

FHLC's 13.33% year-to-date (YTD) return as of July 2025 outperforms XLV's 13.55% and VHT's 11.2%—a narrow but notable margin. Over longer horizons, FHLC's 6.24% annualized return over five years trails XLV's 7.1%, but its lower volatility (beta of 0.66 vs. XLV's 0.81) suggests it's less prone to sharp downturns.

Critics might note FHLC's -5.3% 1-year return, but this reflects sector-wide struggles in 2024, including pricing caps on insulin and Medicare drug reforms. FHLC's index-based approach mirrors the market's ups and downs, making it a better “pure play” for investors who believe in the healthcare sector's long-term resilience.

Risks and Considerations

1. Large-Cap Dominance: While FHLC's focus on large caps reduces risk, it also limits upside in a sector where small/mid-cap biotechs often drive innovation.
2. Regulatory Headwinds: Healthcare is a policy-sensitive sector. FHLC's heavy weighting in health services (17%) and tech (77.5%) makes it vulnerable to legislative changes, such as drug-pricing laws.
3. Liquidity Concerns: FHLC's $2.4B in assets under management (AUM) are smaller than XLV's $9.8B, though its trading volume remains sufficient for most retail investors.

Investment Thesis: FHLC as a Core Holding

FHLC excels as a low-cost, broad-based core healthcare position for investors seeking steady exposure without active management fees. Its 0.08% expense ratio and 400+ holdings make it a better value than VHT, while its lower volatility edges out XLV for risk-averse portfolios.

When to buy:
- Long-term investors bullish on U.S. healthcare's resilience amid reforms.
- Risk-averse allocators seeking diversification beyond a handful of mega-cap stocks.

When to avoid:
- Sector-specific contrarians betting on a prolonged healthcare slump.
- Active traders seeking concentrated biotech exposure (FHLC's small-cap slice is limited).

Final Take

FHLC isn't a flashy ETF, but its blend of cost efficiency, diversification, and sector purity makes it a standout core holding. While no fund is immune to healthcare's challenges, FHLC's structure positions it to weather volatility and capitalize on the sector's long-term growth drivers—from aging populations to medical innovation. For most investors, FHLC deserves a place in their healthcare allocations—no compromise required.