Business Insider

Health care bonds may help your portfolio

Everyone needs health care services at some point in their lives. Do health care bonds make sense today for smart investors hoping to diversify their portfolios?

The health care industry is growing, despite the changes and challenges presented by the Affordable Care Act. Health care continues to occupy a larger portion of the U.S. economy, and this growth makes health care bonds worth a second look.

Health care bonds present a higher degree of risk than other types of municipal bonds but may also offer higher rewards. They might compliment lower-risk general obligation bonds, such as those that finance school, water and sewer projects.

When researching health care bonds, look for multistate, multisite health systems. These large systems often operate more like private businesses, aiming for strong operating margins, better market share position, and experienced management teams. But unlike for-profit corporations, private health care systems do not pay dividends, nor do they have shareholders.

Almost every state issues bonds through a financing authority, so a bondholder may receive federal tax-free income, and in some cases state tax-free income. Many health care bonds are rated AA, on average, by Standard & Poor’s and Moody’s.

Health care bonds are not without risk: Payments are made directly from net revenues of the health system, and the bonds are rarely backed by a taxing authority or dedicated revenue source. Many have long maturity dates of 10-15 years, making them susceptible to interest-rate risk.

They could provide a lift for your income needs and add diversification to your bond account.

Mark Daly is managing director and investment officer at Daly & Vachek Investment Consulting Group of Wells Fargo Advisors.; 333-1433. This column appears in the Oct. 19-Nov. 15, 2016, edition of the Idaho Statesman’s Business Insider magazine as part of a special section on the business of health. Click here for the e-edition (subscription required).