Playing The US Health Care Sector With ETFs

We’ve all been waiting on pins and needles to see what kind of health care reform comes out of Washington. Aside from the fact that we’re all patients of one kind or another, health care is a huge part of the economy.

As you might expect with big changes afoot, health care stocks have been bouncing up and down this year. Such volatility can be frightening - but it also brings opportunity for investors who know how to take advantage.

The wave of new exchange-traded funds (ETFs) launched in the last few years gives you plenty of ways to bet on health care trends. In fact, there are more than two dozen health care ETFs to choose from.

Like technology and financials, health care can be broken up into several sub-sectors. So today I’ll describe these and list a few ETFs for you to consider …

General Practice: Diversified Health Care ETFs

If you’re looking for an ETF to get you into health care quickly and easily, maybe as part of a long-term asset allocation strategy, you can pick from several broad sector funds.

• SPDR Select Health Care Sector (XLV)
• Vanguard Health Care ETF (VHT)
• iShares Dow Jones U.S. Health Care (IYH)
• PowerShares Dynamic Health Care (PTH)

All of these are great funds, well diversified and liquid. I mentioned XLV in last week’s Money and Markets column because it contains the health care components of the S&P 500 index (^GSPC).

One drawback to these funds is that they’re focused strictly on U.S. stocks while health care is a worldwide industry. In fact, several of the biggest pharmaceutical firms are headquartered in Europe. There are, however, global and international health care ETFs to help you diversify geographically, such as:

• iShares S&P Global Health Care (IXJ)
• SPDR S&P International Health Care (IRY)
• WisdomTree International Health Care (DBR)

IXJ includes both U.S. and foreign health care stocks while IRY and DBR are composed exclusively of non-U.S. stocks.

Medical Delivery: Health Care Provider ETFs

Providers are where the rubber glove meets whatever part of you needs help. Examples include: Hospitals, labs, pharmacies, radiology facilities, and all kinds of companies that deal directly with patients.

This sub-sector also includes health insurance providers, since they’re the financial conduit through which most people get their care. Currently only two ETFs cover this group:

• iShares Dow Jones U.S. Health Care Providers (IHF)
• PowerShares Dynamic Health Care Services (PTJ)

Of these, IHF is by far larger and more actively traded, but PowerShares is growing fast, too.

Take Your Pills: Pharmaceutical ETFs

Our country seems to be taking more and more pills these days. I’m not sure whether this is a good thing - but the companies that make top-selling drugs are very profitable.

The pharmaceutical sub-sector consists of both massive global drug makers and niche start-ups that are trying to develop new treatments. You’ll also find generic drug makers in here trying to provide you with lower-cost medicine when the patents expire on the big-name drugs.

Three ETFs covering the pharmaceutical companies are:

• iShares Dow Jones U.S. Pharmaceuticals (IHE)
• PowerShares Dynamic Pharmaceuticals (PJP)
• SPDR S&P Pharmaceuticals (XPH)

Designer Genes: Biotechnology ETFs

I discussed biotech ETFs in my Money and Markets column back in July. The sector went on a tear for the next couple of months and is now consolidating. When it starts to take off again, you might want to consider these ETFs:

• iShares Nasdaq Biotechnology (IBB)
• SPDR S&P Biotech (XBI)
• First Trust NYSE Arca Biotechnology Trust (FBT)
• PowerShares Dynamic Biotech & Genome (PBE)
• PowerShares Global Biotech (PBTQ)

Keep in mind that biotech is a volatile sub-sector that can turn on a dime. But if your timing is right, any of these funds could deliver huge gains!

Beeping Machines: Medical Device ETFs

If you’ve been in a hospital lately, you know they’ve gone high-tech. The variety of machines they use is staggering - and so is the difference they make in our lives. You might even have a medical device inside you right now.

Pacemakers, knee replacements, heart stents - all of these wondrous things are designed and built by somebody. And they don’t come cheap.

Surprisingly only one ETF specializes in this segment: iShares Dow Jones U.S. Medical Devices (IHI). It’s a great little niche fund with a good assortment of companies.

For the more adventurous ETF investors there are also leveraged and inverse ETFs that focus on the health care sector. Just be sure you understand the additional risks before going this route.

What impact will health care reform have on these sector funds? I think it’s too soon to say. But if you decide to invest in this exciting industry, ETFs give you plenty of choices. Good luck!

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