Executive Summary: Health Care and Energy, once standout actively managed sector options, have lost their edge. Strategy shifts, manager changes and lagging performance have tipped the scales against them. I still believe in active management—but not here. If you want sector exposure, Vanguard’s index funds (or ETFs) are now the smarter choice.
Can active management still win in the world of sector investing?
At Vanguard, the answer used to be a resounding “Yes.” Health Care (VGHCX) and Energy (VGENX)—both run by Wellington—gave investors a real shot at beating their respective markets and, on occasion, the overall market, and they delivered for years.
But times change. Strategies evolve, managers move on, and the numbers tell a clear story: Vanguard’s active edge in sectors has faded.
So, if you’re looking to tilt your portfolio toward energy or health care stocks, you’re better off going passive. Here’s why.
From Active Roots to Index Reality
Vanguard entered the sector game over 40 years ago, launching five actively managed funds in May 1984. Today, only two remain largely intact: Health Care and Energy. (Though, as I’ll explain, Energy’s mandate got a significant makeover in October 2020.)
Of the other three original active sector funds, two were merged out of existence long ago. A third—Precious Metals & Mining—was overhauled in 2018 and recast as Global Capital Cycles (VGPMX). Vanguard’s utilities fund (launched in 1992) was eventually transformed into Dividend Growth (VDIGX).
Fast forward to today, and sector investing at Vanguard is now primarily an indexing story. I recently examined their sector index funds (and ETFs) from both a long-term and tactical perspective. Now, I’m turning to the firm’s last two active holdouts—Health Care and Energy.
I’ll lay out the long-term case for investing in each sector and explain why I’ve shifted my preference to the passive options over the Wellington-run active funds.
The Case for Health Care
Health care is essential. People spend on it in good times and bad, making the sector relatively resilient during recessions. It’s also one of the most diverse corners of the market, spanning everything from global pharmaceutical giants to high-risk biotech firms to niche device makers.
Looking ahead, three long-term tailwinds—globalization, innovation and demographics—should continue to push health care spending higher for decades.
And, as I showed you two weeks ago, health care is the rare sector where stocks have kept pace with the market while taking on less risk.
If you’re nodding along, a dedicated healthcare fund could be a smart addition to your portfolio.
Health Care’s Active Edge Fades
Over the past four decades, Health Care has seen just three lead managers—Ed Owens, then Jean Hynes, and now Rebecca Sykes. Let’s break down how the fund has performed under each one.
Ed Owens: A Quiet Giant
Ed Owens ran the fund from its 1984 inception through 2012. He was one of the best portfolio managers that most investors had never heard of.