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Health Care Sector Funds Get a Checkup

Kevin Baker

In this week's checkup on health care and biotech funds, TheStreet.com Ratings found the industry's performance to be pretty healthy.

Of the 97 health care and biotech funds we track, 87 rose in value, nine fell, and one was unchanged. The group averaged a total return of 0.86% for the four trading days from the close on Thursday, April 5, through Thursday, April 12.

On March 22, my article on HealthShares highlighted 14 new ETFs that cover highly specialized areas of the health care industry. With their individual lack of diversification, it is no surprise that four of these funds wasted no time in making our top- and bottom-performing lists this week. One became the best-performing with another setting the low mark.

The top performer this week is the HealthShares Cardiology ETF(HRD Quote), which jump-started to a 6.85% total return.

The fund's largest holdings are Barr Pharmaceuticals(BRL Quote), Biovail(BVF Quote), Atherogenics(AGIX Quote), and Millennium Pharmaceuticals(MLNM Quote). Notable movers include Nuvelo(NUVO Quote), up 17.47%, Atherogenics, up 13.21%, and Momenta Pharmaceuticals(MNTA Quote) up 7.56%.

While our ratings model does not directly consider rumors, that didn't stop speculators from whispering that Nuvelo would start a new study of its drug Alfimeprase as an anticlotting stroke treatment. The company's VP claims it has "no plans to make an announcement" prior to July 1.

HealthShares Autoimmune-Inflammation ETF (HHA Quote), another new fund, painlessly rose 4.85% on the period. This fund is half (51.75%) pharmaceuticals and half (48.25%) biotechnology stocks, with large holdings of Immunomedics (IMMU Quote), Genmab A/S, Aspreva Pharmaceuticals (ASPV Quote) and Cytos Biotechnology AG.

Immunomedics climbed the most, jumping 16.6%. Other holdings that had a good week include PDL BioPharma (PDLI Quote), up 7.92%, Rigel Pharmaceuticals (RIGL Quote), up 6.52%, and Elan (ELN Quote), up 5.88%.

At the other end of the spectrum, investors in the brand new HealthShares Neuroscience(HHN Quote) ETF have so far avoided brain damage but were diagnosed with a mild concussion after a knock of 2.34%. Some 13.7% of the fund is invested in New River Pharmaceuticals (NRPH Quote), with 8.1% in Schwarz Pharma and 5.8% in King Pharmaceuticals (KG Quote).

Only four of the 22 HealthShares Neuroscience holdings fell. The fund would have had a good week, but unfortunately Adolor (ADLR Quote) lost more than half its market value, amputating 58.68% off the share price.

The cause: Adolor stopped development of Entereg, a bowel-disorder drug, when their study showed higher than normal rates of heart attacks, tumors and bone fractures.

That is the risk an investor takes when selecting individual biotechnology or pharmaceutical stocks. At least the 18 better performing stocks cushioned the blow.

Also underperforming this week is the (FSHCX Quote)Fidelity Select Medical Delivery Portfolio with a total return of -0.97%. Biolase Technology (BLTI Quote), a maker of dental and cosmetic lasers, sliced off 25.44% of its stock value on reporting of a first quarter net loss, and Imaging Dynamics, a builder of digital X-ray machines, gave back 18.07% as investors saw through the board shake-up to focus on the expectation of continued bottom line losses.

The fund's diversification across the health care industry, with 46.0% health care services, 29.6% pharmaceuticals, 12.3% commercial services, 5.6% health care products, 1.8% insurance and 1.8% Internet, prevented a wider decline.

Speculators tend to overreact, sending stocks higher than they should go on positive rumors and punishing them a bit too harshly when they disappoint. While I am generally bullish on the health care and biotech industry, the low ratings earned by these funds warn of high volatility. Stay safe.