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5 Best Performing Healthcare Mutual Funds of 2016

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President Donald Trump’s warning to the pharmaceutical industry over exorbitant drug pricing did irk investors, but, his business tax plans and intentions to “repeal and replace” the Obamacare should be a boon for healthcare companies.

A string of merger and acquisitions and several products getting approval should also boost healthcare firms, while they are also vying to capitalize on biosimilars because of its high-revenue potential. Banking on these positives, investing in healthcare funds seems to be judicious.

Trump Victory: Big for Healthcare

Trump’s plan to repeal Obamacare, free up cash currently held overseas for tax reasons along with his rhetoric on the campaign trail suggested that he will be more amicable toward the healthcare industry.

Even though Obamacare helps purchase insurance plans at a subsidized rate, it does levy taxes on the industry, which reduces profitability. A tax target is set, which will be collected from the drug industry on an annual basis. This year, the target was expected to rise to $4 billion from $3 billion this year. This implies that a drug maker having 15% market share of all branded drug sales will have to pay around $600 million in taxes next year. If such a fee is nullified by repealing Obamacare, it will significantly boost earnings for biotech firms.

Trump’s business tax plan should also benefit healthcare companies. He plans to trim business tax rate to 15% from 35%. The lower tax burden is expected to boost profits for large healthcare firms. Such firms can, in the meantime, repatriate cash held overseas and only pay 10% tax on it, as per Trump’s policy. This extra cash can be further utilized to buy back stocks, boost earnings, pay dividends or invest in drug research.

Deals to Boost Healthcare Firms

Merger and acquisitions and licensing deals, in the meanwhile, continue to hog the limelight in the healthcare sector. Some latest deals include Japan-based Takeda Pharmaceutical Company Limited’s TKPYY agreement to acquire ARIAD Pharmaceuticals ARIA in an all-cash deal worth around $5.6 billion. Pharma giant Johnson & Johnson (JNJ - Free Report) is reportedly looking to take over Actelion Ltd ALIOF.

Deals are further expected to increase in the coming months, while market sentiment seems to be improving, courtesy of raised outlooks, new product approvals and encouraging pipeline updates.

Top 5 Healthcare Mutual Funds of 2016

The aforementioned bullish factors call for investing in healthcare funds, even though the future is a little uncertain until Trump formalizes his plans for the sector. Moreover, investors often rely on the healthcare sector to safeguard their investments. This is because demand for healthcare services does not vary much with market conditions and investments.

Many pharma companies also pay regular dividends. These companies are financially stable and generate consistent cash flows irrespective of market conditions.

We have, thus, selected five solid healthcare mutual funds. These funds have given impressive return in the last one-year period, boast a Zacks Mutual Fund Rank #1 (Strong Buy) or 2 (Buy), offer a minimum initial investment within $5,000 and carry a low expense ratio.

The question here is why should investors consider mutual funds? Reduced transaction costs and diversification of portfolios without the several commission charges that are associated with stock purchases are the primary reasons why one should be parking money in mutual funds (read more: Mutual Funds: Advantages, Disadvantages, and How They Make Investors Money).

Fidelity Select Medical Equip & SystemsFSMEX invests the majority of its assets in securities of companies principally engaged in research, development, manufacture, distribution, supply, or sale of medical equipment and devices and related technologies. It invests primarily in common stocks.

FSMEX has returned 22.92% in the last one year period. Annual expense ratio of 0.75% is below the category average of 1.33%. FSMEX has a Zacks Mutual Fund Rank #1.

Live Oak Health Sciences LOGSX invest a large portion of its net assets in equity securities of health sciences companies. The fund invests primarily in common stocks of U.S. companies.

LOGSX has returned 9.94% in the last one year. Annual expense ratio of 1.11% is lower than the category average of 1.33%. LOGSX has a Zacks Mutual Fund Rank #2.

Schwab Health Care SWHFX invests a major portion of its assets in equity securities issued by companies in the healthcare sector.

SWHFX has returned 6.12% in the last one-year period. Annual expense ratio of 0.80% is lower than the category average of 1.33%. SWHFX has a Zacks Mutual Fund Rank #2.

Hartford Healthcare HLS IA HIAHX invests the majority of its assets in the equity securities of healthcare-related companies worldwide as selected by the sub-adviser.

HIAHX has returned 6.24% in the last one year. Annual expense ratio of 0.86% is below the category average of 1.33%. HIAHX has a Zacks Mutual Fund Rank #2.

Fidelity Select Health Care FSPHX invests a large portion of its assets in securities of companies principally engaged in the design, manufacture, or sale of products or services used for or in connection with healthcare or medicine.

FSPHX has returned 2.56% in the last one-year period. Annual expense ratio of 0.72% is lower than the category average of 1.33%. FSPHX has a Zacks Mutual Fund Rank #2.

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