Fidelity MSCI Health Care Index ETF (FHLC)

The Fidelity MSCI Health Care Index ETF is a passive exchange-traded fund that owns a diversified basket of US healthcare companies by tracking the MSCI USA IMI Health Care 25/50 Index. It gives shareholders direct exposure to the profits, patents, and aging-driven demand shifts that define the healthcare sector.

What it holds and why

FHLC does not try to pick the best health care stocks. Instead, it holds nearly all the largest and mid-sized US companies in the sector—drugmakers like Eli Lilly and Pfizer, medical device manufacturers like Johnson & Johnson and Intuitive Surgical, hospital operators and insurance platforms like UnitedHealth. The MSCI USA IMI Health Care 25/50 Index, which the fund tracks, is weighted by market capitalization, so the largest companies make up the largest portion of the fund. Eli Lilly and Johnson & Johnson together account for roughly a quarter of the portfolio. This concentration in mega-cap stalwarts means FHLC is less a pure health care bet than a bet on the health care assets of America’s largest healthcare companies. The fund is nearly pure healthcare, with 99+ percent of assets in the sector and minimal spillover into other industries.

The MSCI angle and passive management

Fidelity licenses the MSCI index framework and uses it to build the fund’s holdings. MSCI indices are constructed and maintained by MSCI Inc., a data and indexing firm, and are widely used as benchmarks across the investment industry. The fund’s job is mechanical: own the constituents of the index in the correct weights and rebalance quarterly. This passive approach keeps costs low. The expense ratio—the annual fee charged to investors—is tiny, typically under 0.10 percent. Because there is no active stock picking, no trading in and out of positions based on conviction, and no management team trying to beat the index, there is no excess return to chase but also no excess cost to pay (beyond the licensing fee and minimal trading costs).

Why health care, why now

The health care sector has distinct characteristics that appeal to different investor types. Drug development, surgical innovation, and the aging of populations in developed economies mean there is persistent organic demand for healthcare goods and services even in recessions. Patent cliffs, regulatory changes, pricing pressure, and consolidation waves create periods where the sector outperforms and others where it lags. A passive health care fund sits in the middle: it benefits from the sector’s growth drivers (demographic aging, rising healthcare spending) without trying to time when specific stocks or sub-segments will perform well. For investors who want sector allocation without stock selection, FHLC is the obvious vehicle.

Risks and concentration

The two biggest names carry significant weight. A negative earnings surprise at Eli Lilly or a pricing setback at Johnson & Johnson will move the entire fund noticeably. The sector is also exposed to regulatory change—pharmaceutical pricing regulation, healthcare reform, or changes to Medicare reimbursement can hit all boats at once. Medical device and pharma companies face product liability risk and patent expiration, which can erode profitability. Health insurance operators like UnitedHealth depend on underwriting discipline and encounter risk from claim volatility. Because the fund is 99 percent healthcare, there is no diversification into other sectors during periods when healthcare underperforms the broader market.

How a reader would research it

Start with the fact sheet, which lists the top ten holdings and the net asset value. The MSCI index methodology document explains how companies are selected and weighted. Looking at historical performance relative to the MSCI health care index itself will show you the tracking error—whether Fidelity’s implementation is faithful to the benchmark. The fund’s annual report discloses all holdings and sector breakdowns. Understanding the health care sector requires following earnings reports from the major pharmaceutical and device firms, watching for FDA approvals of new drugs, and monitoring legislative proposals around drug pricing and healthcare costs. A prospectus explains the fee structure and tax efficiency. Because this is a sector fund held in a diversified portfolio (not as the entire equity allocation), comparing its returns and volatility to the broad market index helps investors decide whether healthcare is currently overweight or underweight in their own mix.