ETFs a Safer Way to Bet on Health Care

The uncertainty over the future of health care has exacted a toll on the industry. ETFs like iShares Dow Jones US Healthcare Provider(IHF Quote), Pharmaceutical HOLDRs(PPH Quote) and iShares Biotechnology(IBB Quote) all will be affected differently by changes in legislation.

One fact remains indisputable, however: America is getting older. As baby boomers reach old age, health care costs are expected to skyrocket. Whether or not new legislation transforms our existing system, costs likely will rise over the long term.

Wealth in Healthcare?

Picking individual drug companies or health care providers can be a tricky business, as outside factors like drug trials, lawsuits and legislation can weigh on results. ETFs are an effective way to mitigate the risk of investing in a single health care company by exposing investors to a basket of securities, rather than a hit-or-miss pick.

The three main categories of health care ETFs are pharmaceutical, health care provider and biotechnology. Other, more specialized ETFs like iShares Dow Jones U.S. Medical Devices Index Fund(IHI Quote) and international funds like WisdomTree International Health Care Sector Fund(DBR Quote) offer different perspectives.

Health care providers could have the most to lose in the battle for America's health care. iShares Dow Jones US Healthcare Provider(IHF Quote) plummeted more than 40% in 2008 as investors tried to estimate the extent of health care reform. Top IHF components like UnitedHealth Group(UNH Quote) and Medco Health Solutions(MHS Quote) could be dramatically affected by a large shift toward a government "option" program.

Health care price regulation could promote the use of generics at the expense of the pharmaceutical industry. Generic drugs have become more prevalent in recent years and have eaten into the profits of some of the large drugmakers. Pharmaceutical HOLDRs includes drugmakers like Abbott Labs(ABT Quote) and Bristol-Myers Squibb(BMY Quote).