What is FXH? (Pros, Cons, and Strategies)

Investors exploring healthcare options within the ETF market may come across FXH, an ETF that focuses on the healthcare sector. For those considering long-term investments, FXH can offer a balanced exposure to various healthcare sub-industries. In this blog post, we’ll discuss what FXH is, and delve into its advantages, disadvantages, and strategies for investment.

What is FXH?

FXH (First Trust Health Care AlphaDEX Fund) is a sector-specific ETF that focuses on the healthcare industry. The fund uses the AlphaDEX stock-selection methodology, which is designed to target individual stocks with strong growth potential within the healthcare sector.

Key Features of FXH

• Selection based on AlphaDEX methodology, aiming to outperform traditional indices.
• Focus on mid to large-cap healthcare companies.
• Well-diversified within the healthcare sector, including pharmaceuticals, biotechnology, medical devices, and healthcare services.

The AlphaDEX methodology uses a set of quantitative criteria to evaluate and rank stocks within the healthcare sector, aiming to identify those with the best potential for growth.

FXH Composition

FXH includes a variety of companies within the healthcare sector, from pharmaceuticals like Pfizer (PFE) and Johnson & Johnson (JNJ) to biotech firms like Amgen (AMGN) and Gilead Sciences (GILD), as well as medical device companies like Medtronic (MDT).

The fund strives to balance exposure to various segments within healthcare, aiming to provide both growth and stability through diversification.

Pros of FXH

Diversified Healthcare Exposure

One of the primary advantages of FXH is its diverse exposure to different parts of the healthcare sector. Instead of focusing on a single sub-industry, it includes pharmaceuticals, biotech, medical devices, and healthcare services.

Growth Potential

FXH employs the AlphaDEX methodology, which attempts to pick stocks with the highest growth potential within the healthcare sector. This selection method helps FXH focus on companies that are likely to perform well based on quantitative factors such as earnings momentum and valuations.

Stability in Downturns

Healthcare is considered a defensive sector, meaning that it tends to be less susceptible to economic downturns. This characteristic makes FXH a more stable investment option during times of market volatility.

Cons of FXH

Sector-Specific Risks

Because FXH is heavily focused on the healthcare sector, it is subject to sector-specific risks such as regulatory changes, drug approval processes, and patent expirations. This lack of sector diversification can result in higher volatility compared to more broadly diversified ETFs.

Management Fees

The expense ratio of FXH is higher than some other broader ETFs. The fee is 0.63%, which can eat into returns over long-term investments when compared to lower-cost index funds.

Sensitivity to Political Climate

Healthcare is often subject to political scrutiny and regulation, particularly in the U.S. Changes in healthcare policy or regulation can have a significant impact on the stocks within FXH, introducing an element of unpredictability.

FXH Investment Strategies

Given its unique focus and the factors mentioned above, let’s explore some strategies for investing in FXH:

Long-term Investment Strategy

For those looking to invest in the healthcare sector for the long term, FXH can provide a balanced exposure to multiple healthcare sub-sectors. The AlphaDEX methodology aims to ensure that investors are positioned in the stocks with the greatest potential for performance.

Sector Rotation Strategy

Another approach is to incorporate FXH into a sector rotation strategy. Investors can allocate funds to FXH during periods when the healthcare sector is expected to outperform and shift assets to other sectors when healthcare is expected to lag.

Defensive Investment Strategy

As a defensive sector ETF, FXH can be used as a hedge against market volatility. Investors can increase their allocation to FXH when facing uncertain market conditions to leverage the stability of healthcare stocks.

Conclusion

FXH stands out as a healthcare-focused ETF, leveraging the AlphaDEX methodology to target stocks with the highest growth potential within the sector. While its diversified approach within healthcare provides stability, investors must be mindful of sector-specific risks and management fees. By employing strategies such as long-term investment, sector rotation, and defensive positioning, FXH can be utilized to benefit from the healthcare sector's strengths in various market conditions.

Whether you’re looking to enhance your exposure to the healthcare market, hedge against broader market volatility, or seek growth opportunities, FXH offers a unique blend of elements that could align well with your investment goals.