Research on the Application and Expansion of Fama-French Model in Healthcare Industry (ETF)

Abstract

Research about the Fama-French (F-F) model has long attracted significant academic attention. This study explores the application and extension of the F-F model within the healthcare sector. Using the Vanguard Health Care ETF (VHT) as a representative of the healthcare sector, this research examines its monthly returns over the period from 2014 to 2024. A comparison between the Fama-French three-factor (FF3) and five-factor models (FF5) reveals that the FF5 model is more suitable for the healthcare industry, the impact on ETF returns increased by 3.82%. To identify a model better suited for the healthcare sector, this study extends the FF5 model by incorporating an additional 11 factors. Through stepwise regression and significance testing, the final model with the highest adjusted R value and strongest explanatory power for ETF returns was constructed. The independent variables in this Extension model include market excess returns (Rm-Rf), HML, CMA, the momentum factor (MOM), inflation rate (INFR), employment change rate (EMP), and the PPI for medical laboratories (PPILAB). Compared to the original FF5 model, which had an adj R of 0.6980, the Adj R of the Extension model increased to 0.7359, demonstrating a better fit for the healthcare industry. As a result, with the help of this study, investors will be better equipped to use the F-F Model and make informed investments in the healthcare sector.