ETF Talk: Is the Health Sector a Cure For Market Sickness?

I am sympathetic toward any investors who may feel a little ill when looking at their beaten-down investment portfolios. Since the market’s stomach-churning plunge last October and its subsequent volatility, I know many people are nervous and looking for a way to calm their fears. Could health care offer a solution?

Well, there are several healthcare exchange-traded funds (ETFs) that may be able to help soothe queasy stomachs. The healthcare sector has been growing rapidly in the last decade, with the industry’s portion of the national economy doubling to nearly 16% of gross domestic product (GDP). Coupled with the Obama administration plans to inject $634 billion into the sector during the next 10 years, now may be a good time to examine the industry’s outlook.

Healthcare historically is somewhat recession-proof. People who get sick need treatments — period. It doesn’t matter if the economy is weak. For those who have an appetite for risk, the healthcare industry offers many opportunities for investment.

Now keep in mind that the performance of health-care funds can fluctuate widely. While healthcare ETFs such as iShares S&P Global Healthcare (IXJ), Vanguard Health Care ETF (VHT) and WisdomTree International Health Care Sector Fund (DBR) fell more than 20% in 2008, they all beat the Dow, which lost 33%. However, Healthcare Select Sector SPDR (XLV) had the worst performance of them all with a 56% reversal. With the market starting to head upward, healthcare is one of the sectors that could soar.

I am not yet convinced that the healthcare sector is an elixir for anybody’s ailing portfolio. Although the Obama administration is championing a plan to expand the government’s role in providing healthcare, it is unclear to me and probably many others what truly is affordable for a country that is running massive deficits. Plans that sound great in concept sometimes lose support when their actual long-term cost becomes clear.

Regulatory changes and policy shifts certainly could change the entire landscape of the pharmaceutical industry as we know it. For example, there has been a period of remarkable instability in the prices of drug manufacturers since President Obama took office. This volatility can be seen from the chart below comparing Merck (MRK) and Boston Scientific (BSX).

With the changing political landscape and doubts about the potential profitability of new pharmaceuticals under development, the industry’s future remains uncertain. As a result, patience is required for anyone who wants to invest in this sector.

If you are cautious — and I certainly hope you are — waiting for the right time to get into the market might be a good way of mitigating risk. If the healthcare and pharmaceutical sectors look enticing to you, then a long position in one of these ETFs just might be what the doctor ordered.

If you want further guidance about which ETFs to trade, check out my ETF Trader service by clicking here. As always, I am happy to answer any questions that you have about ETFs. To send me your questions, simply click here. I will try to follow up in a future ETF Talk.