There are four basic scenarios: You hedge health care costs (tilt health care), and health care costs go up. Fortunately, you benefit financially from this so you can handle the increase costs without issue. You don't hedge health care costs, and health care costs go up: uh oh, you have to tighten your belt / find some work.
You hedge health care costs, and health care costs go down. As mentioned above, no big deal. You don't hedge health care costs, and health care costs go down. Hooray, extra money.
Ok, let me get this straight. So if the fund goes up it'll yield enough that it will benefit you so you can pay for increased health care (nevermind that I might not need significant healthcare for many more decades). But if it goes down the hedge is so small it doesn't matter. Uh, what? Do I see an inconsistency here? Either it's too small to make a difference, or it's big enough to do so. It can't be both depending on the outcome!
Also; extending this should I also hedge home repair cost with shares of home depot, and electricity with shares i utilities, and food cost, and... etc?
I could have worded it a little better: If healthcare costs go down, even though the amount of spending you can sustain goes down, your healthcare costs will have gone down proportionally.
With regards to the other sectors: Are you expecting home repair costs, utilities, and food to exceed 20% of your budget? Most retirees hedge housing costs in general by owning their home, the other major expenditure. (Though admittedly health care isn't a huge cost for everyone, it is a huge potential cost for everyone, especially as they age).
These things are also somewhat more discretionary than health care. You can use less electricity, adapt your diet for less costly food, and DIY some of the home repair/make do (I suppose this doesn't really apply for a super lean retirement plan where you already are minimizing most of these costs). If you have cancer, well, you're spending whatever they tell you the price is. Or dying. Not much of a choice.
I use a small hedge toward health care because it's such a disproportionate cost in the "worst case" scenario: maxing out-of-pocket every year. I do this instead of budgeting toward that expense, which I've seen some people do as a caution.
I think buying a healthcare index funds as a hedge for your healthcare costs is a bit nutty. A lot of the money flowing in healthcare goes to entities that aren't going to be represented well or at all in the index (like individual doctors, private groups of physicians, "nonprofit" institutions, "nonprofit" insurers, medical device manufacturers, and many foreign firms. In fact, there are only 72 stocks in the fund! All it takes is for medical cost inflation to start matching CPI and the price of the fund should drop by 50% as PEs drop to reflect the new growth expectations.
Our health spending is unsustainable. Something will change at some point to correct that.
I hope it does. However, knowing if that's in the next 10 years, next 30 years, or 50 years is a different story. Personally, I prefer to be hedged.
I don't think I'd recommend it for someone who was very early on the FIRE path.I'm rapidly closing in on my FIRE date, so it let's me sleep better at night - much more comfortable with my decision to go with a HDHP.
Basically, I believe a small health care tilt reduces the "failure chance" of my portfolio.
Not to be pedantic, but I do think VHT does include device manufacturers. It doesn't include insurance, though I'm not terribly bothered by that. I'm not aware of a good option for international healthcare tilting, so while in principal I would agree that would be a better diversification, the costs of trying to implement that are unrealistic.