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Healthcare Spending Likely to Remain Firm: 3 Fund Picks

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The healthcare sector registered a gain of more than 6% in November. As a matter of fact, Health Care Select Sector SPDR ETF (XLV) has increased 12.4% year to date (YTD). Continuous innovation and research in the field of biotechnology and an increasingly aged population in the United States are helping whet appetite for healthcare shares.

Moreover, per a report from the U.S. Centers for Medicare and Medicaid Services (CMS) on Dec 6, healthcare spending in the United States increased for the second straight year in 2017. This was achieved on the back of low spending on hospital care, physician and clinical services as well as retail prescription drugs. Considering all these factors, this might be the right time to bet on healthcare mutual funds.

US Healthcare Spending Crosses $3 Trillion in 2017

The CMS reported on Thursday that national spending on healthcare increased 3.9% to $3.5 trillion in 2017. For the records, spending on healthcare had increased 4.8% in 2016. Earlier, the CMS had predicted that this spending would increase by around 5.3% in 2018. This was because CMS actuaries opined that rising prices of medical goods and services and higher Medicaid costs would increase overall spending.

In terms of total GDP, approximately 17.9% of the annual GDP in 2017 was allotted to healthcare. As a matter of fact, this figure remained unchanged from 2016 because the U.S. economy exhibited 4.2% annual growth in 2017.

The report also sheds light on an interesting fact. Both households and the federal government spend the highest share on healthcare services, 28% each. Private business houses and state and local governments account for approximately 20% and 17%, respectively. The remaining portion of the pie is paid for by ‘other private sources.’

3 Best Choices

We have, thus, selected three healthcare mutual funds carrying a Zacks Mutual Fund Rank #1 (Strong Buy) or 2 (Buy) that are poised to gain from such factors. Moreover, these funds have encouraging three and five-year returns. Additionally, the minimum initial investment is within $5000.

We expect these funds to outperform their peers in the future. Remember, the goal of the Zacks Mutual Fund Rank is to guide investors to identify potential winners and losers. Unlike most of the fund-rating systems, the Zacks Mutual Fund Rank is not just focused on past performance but also on the likely future success of the fund.

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

Fidelity Select Health Care Svcs Fund (FSHCX - Free Report) seeks capital appreciation. FSHCX normally invests at least 80% of assets in common stocks of companies principally engaged in the ownership or management of hospitals, nursing homes, health maintenance organizations, and other companies specializing in the delivery of healthcare services.

This Sector – Health product has a track of positive total returns for more than 10 years. Specifically, the fund's returns over the three and five-year benchmarks are 15.9% and 16.8%, respectively. To see how this fund performed compared to its category, and other #1 and 2 Ranked Mutual Funds, please click here.

FSHCX has a Zacks Mutual Fund Rank #1 and an annual expense ratio of 0.76%, which is below the category average of 1.28%.

Fidelity Select Biotechnology (FBIOX - Free Report) invests the majority of its assets in securities of companies principally engaged in the research, development, manufacture and distribution of various biotechnological products. The fund invests in domestic and foreign issuers.

This Sector – Health product has a track of positive total returns for more than 10 years. Specifically, the fund's returns over the three and five-year benchmarks are 0.2% and 9.3%, respectively. To see how this fund performed compared to its category, and other #1 and 2 Ranked Mutual Funds, please click here.

FBIOX has a Zacks Mutual Fund Rank #2 and an annual expense ratio of 0.73%, which is below the category average of 1.28%.

T. Rowe Price Health Sciences (PRHSX - Free Report) invests the major portion of its net assets in common stocks of companies involved in research, development, production, or distribution of products or services related to health care and life sciences. PRHSX may invest in companies of any size, however, the majority of its assets is invested in large and mid-capitalization companies.

This Sector – Health product has a history of positive total returns for more than 10 years. Specifically, the fund's returns over the one and five-year benchmarks are 8.8% and 14.8%, respectively. To see how this fund performed compared to its category, and other #1 and 2 Ranked Mutual Funds, please click here.

FBDIX has a Zacks Mutual Fund Rank #2 and an annual expense ratio of 0.77%, which is below the category average of 1.28%.

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