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ETFs Can Ease Health Care Stock Headaches

President Bush's victory last November has given health care stocks their widely expected post-election bounce. But owning individual health care names remains perilous, a lesson learned the hard way most recently by investors in Merck (MRK - Get Report) and Chiron (CHIR), among others.

One way investors can smooth out the risk -- while paying a third of the costs of the average open-end health care mutual fund -- is to buy health care exchange traded funds, which have the characteristics of a mutual fund yet still trade very much like stocks.

Three of the four health care ETFs available -- Health Care Select Sector SPDR (XLV), iShares Dow Jones U.S. Healthcare (IYH) and the Vanguard Health Care VIPERs (VHT) -- focus solely on U.S. stocks. Each member of the trio returned close to 9% over the past three months, while the S&P 500 gained 6.4%.

The XLV, IYH and VHT could be considered top-heavy, with each ETF holding well over 50% of its assets in the same 10 names and 25% of their assets in just two stocks, Pfizer (PFE - Get Report) and Johnson & Johnson (JNJ). Rounding out the list are: Amgen (AMGN - Get Report), Abbott Laboratories (ABT), Merck, Medtronic (MDT), UnitedHealth (UNH), Wyeth (WYE), Eli Lilly (LLY) and Bristol-Myers Squibb (BMY).

The iShares S&P Global Healthcare Sector (IXJ), the fourth pharma ETF, has trailed the U.S. benchmark index by a slight 20 basis points since last October. Since this index also incorporates international manufacturers, it carries European pharma giants GlaxoSmithKline (GSK), Novartis (NVS) and Sanofi-Aventis (SNY) in its top 10, displacing Medtronic, Wyeth and Bristol-Myers Squibb.

The four ETFs shake out quite differently beyond their top 10 holdings, however.

The XLV is a select sector SPDR (often referred to as a "Spider") comprising the 55 health care stocks in the S&P 500. As a result, the XLV is the most concentrated of the group and therefore the most susceptible to price swings if a major pharmaceutical company stumbles.
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