Health Care ETFs Seizing the Lead!

I’m a momentum investor. What does that mean? I just try to identify leading market sectors and then keep my portfolio aligned with them. Sometimes the strength is fairly obvious, and at other times it’s harder to pinpoint.

Right now I think we are on the edge of an important change …

Energy stocks, which have been leading the market rally for several months, look like they are starting to roll over. Another sector is moving into the driver’s seat — and it may not be the one you expect. Today I’ll tell you how to get aboard the train before it leaves the station.

Health Care Is the New Leader …
But Which Part?

Right now my indicators are pointing to health care as the new sector leader. This makes some sense. We all need health care because we all want to be healthy. That means stocks in this sector are often categorized as “defensive.” Health care is one of the last things consumers cut back when times get tough.

Yet “health care” is a remarkably diversified sector, covering pharmaceuticals, hospitals, insurance providers, medical equipment makers, and more.

Think about it: When prescription drug usage goes up, it’s good news for pharmaceuticals … but bad news for HMOs that have to pay the bill. If you own both sub-sectors, you may just spin your wheels and go nowhere.

The generic “health care” ETFs can be good as components in a long-term portfolio. For trading purposes, however, I rarely find them very useful. Usually you are better off zeroing in on the strongest part of health care. And ETFs are a great way to do it.

For instance, the current strength in health care is due almost entirely to the biotechnology group. I am a long-time biotech fan, dating back to the 1990s. In those years I made some huge profits and also lived through some staggering volatility. So I was very glad when ETFs gave us a more flexible way to trade this sector.

I wrote about biotech in Money and Markets almost two years ago. You can read Get On the Biotech Bandwagon with ETFs for more background. The list of biotechs I provided in that column is a bit outdated, though. Here are your current choices:

• iShares Nasdaq Biotechnology (IBB)
• SPDR S&P Biotech (XBI)
• Biotechnology HOLDRs (BBH)
• First Trust NYSE Arca Biotechnology (FBT)
• PowerShares Dynamic Biotech & Genome (PBE)
• ProShares Ultra Nasdaq Biotechnology (BIB)
• ProShares UltraShort Nasdaq Biotechnology (BIS)

Note that the ProShares offerings feature 2X daily leverage, and BIS is an inverse ETF. Hence it will typically move in the opposite direction of other biotech funds. BIB and BIS are both designed to track the same index as IBB, which is still the most popular and liquid biotech ETF.

I usually don’t recommend Holding Company Depository Receipts (HOLDRs), as I explained in ETFs Beat HOLDRs Hands Down! That’s why I don’t like BBH, despite its heavy trading volume.

Biotech isn’t always the driver for health care, of course. Sometimes other sub-sectors take leadership. You can participate in those with ETFs, too. Here are a few to put on your watch list:

• iShares Dow Jones U.S. Health Care Providers (IHF)
• PowerShares Dynamic Health Care Services (PTJ)
• iShares Dow Jones U.S. Pharmaceuticals (IHE)
• PowerShares Dynamic Pharmaceuticals (PJP)
• Pharmaceutical HOLDRS (PPH)
• SPDR S&P Pharmaceuticals (XPH)
• iShares Dow Jones U.S. Medical Devices (IHI)
• SPDR S&P Health Care Equipment (XHE)

As you can tell, the list of specialty health care ETFs — other than biotech — is still fairly short. You can pick from two that focus on providers and services, four covering the pharmaceutical industry, and two if you want exposure to health care equipment and devices.

I expect ETF sponsors will narrow the focus further in the next few years. Obviously the health care business is undergoing major changes because of recent legislation. We’ll see how it all shakes out.

For now, just look at what’s possible and make an informed choice.

Best wishes,

Ron