HQH's Biotech Bet: A Risky Gamble for Core Portfolios?

The abrdn Healthcare Investors (HQH), a closed-end fund (CEF) focused on healthcare and biotechnology companies, has long been a magnet for investors seeking exposure to innovation-driven sectors. However, its recent performance, structural risks, and valuation dynamics raise serious questions about its suitability for core portfolios. While the fund's biotech tilt may offer fleeting opportunities, its combination of high expense ratios, extreme sector concentration, and volatile discount-to-NAV trends creates a risky proposition for all but the most speculative investors.

The Biotech Tilt: A Double-Edged Sword

HQH's portfolio is overwhelmingly allocated to the healthcare sector—89.5% as of late 2024—with significant stakes in biotechnology firms like Vertex Pharmaceuticals, Regeneron, and Sarepta Therapeutics. While this strategy aligns with the fund's goal of capitalizing on healthcare innovation, it also magnifies sector-specific risks. Biotech stocks are notoriously volatile, prone to setbacks from regulatory hurdles, clinical trial failures, or shifts in market sentiment. For example, Sarepta Therapeutics' stock plunged over 50% in 2023 amid skepticism about its Duchenne muscular dystrophy drug pipeline—a scenario that could recur.

The fund's heavy reliance on this sector leaves it exposed to macroeconomic and regulatory headwinds. As healthcare spending faces scrutiny in an era of rising interest rates and cost-cutting, biotech's growth narrative may falter. Even without such headwinds, the lack of diversification means HQH's fortunes are tied to a single, high-risk theme—a gamble that core portfolios, designed for stability, cannot afford.

Performance: Underwhelming Returns Amid High Costs

Historical data paints a grim picture of HQH's return profile. Over the past five years, its NAV-based annualized return is a meager 4.82%, trailing the broader healthcare sector and its category peers. Even in 2024, when biotech stocks surged, the fund's NAV returned just 4.19%, versus the category's 12.57%. This underperformance underscores structural inefficiencies, including its 1.12% expense ratio, which ranks among the highest for healthcare CEFs.

The fund's managed distribution policy exacerbates these concerns. While it boasts a 13.01% annualized distribution rate (as of May 2025), nearly half of its June 2025 payout was classified as a return of capital—a red flag. Sustaining distributions through capital erosion erodes long-term value, making HQH a risky bet for income seekers.

Discount Dynamics: A False Sense of Safety

HQH trades at a persistent discount to its NAV, averaging -9.45% over six months and -11.71% over one year as of late 2024. While discounts can signal buying opportunities, the fund's Z-Score of -2.23 (3-month) indicates its discount is far below historical norms, reflecting weak investor confidence. This could mean the market is pricing in future underperformance—or that the discount itself is a trap.

Investors must also consider leverage. Despite its low 1.10% effective leverage, the fund's use of borrowed capital amplifies volatility. In a rising-rate environment, even modest leverage can strain returns, compounding risks for a fund already struggling to outperform.

Structural Flaws: Why HQH Fails as a Core Holding

1. Sector Overconcentration: With 89.5% in healthcare, HQH offers no diversification. A downturn in biotech would hit it harder than broader ETFs like the iShares U.S. Healthcare ETF (IYH), which has a far more balanced sector allocation.
2. High Costs, Low Returns: The 1.12% expense ratio devours capital growth. For context, the iShares Biotechnology ETF (IBB) charges just 0.39%.
3. Volatility: The fund's NAV has swung sharply—e.g., a -26.12% drop in 2008—highlighting its sensitivity to market cycles.

Investment Considerations: Proceed With Caution

While the current discount of -7.01% (as of early 2025) might tempt bargain hunters, HQH's structural flaws make it a poor core portfolio candidate. The fund's chronic underperformance, reliance on return-of-capital distributions, and lack of diversification suggest it belongs only in speculative allocations or tactical trades.

For conservative investors, alternatives like the Vanguard Health Care ETF (VHT) or the iShares S&P 500 Growth ETF (IVW) offer broader diversification and lower costs. If biotech exposure is desired, pairing a smaller allocation to HQH with a diversified ETF could mitigate risk—but even this requires strict monitoring.

Conclusion: A Risk Too Great for Core Portfolios

HQH's biotech tilt is a high-risk, low-reward proposition. While the discount and distribution allure may appeal to short-term traders, the fund's inability to generate consistent returns, coupled with high expenses and extreme sector concentration, makes it unsuitable for core holdings. Investors seeking healthcare exposure should prioritize funds with broader diversification and lower costs. For now, HQH remains a niche bet—best avoided unless one is willing to gamble on biotech's next big breakthrough.