Betting on Boomers for a Healthy Investment

Pricing for these REITs can be high, as you can see from their P/E ratios. Of the 14 health care REITs I identified, the average year-to-date return has been 8.3%, while the average one-year trailing return has been 5.3%. The average P/E ratio for the entire group is currently 26.9 -- and that average excludes Windrose Medical Properties(WRS Quote), a trust having, according to Morningstar, a P/E of 124.3.

In 2005, many health care REITs sustained losses. The average January-June return for all health-care REITs in 2005 was a drop of 11.1%. Three of the 14 health care REITs still show negative 12-month returns thus far in 2006.

Several factors have added to this checkered performance. A prime contributor is concern that health care REITs rely heavily on Medicare/Medicaid reimbursements for cash flow. And there are issues regarding the solvency, promptness and possible reductions of Medicare's reimbursements over the long term.

That doesn't put me off this investment category. It simply tells me that health care REITs with less Medicare dependency are likely be lower-risk, better investments. And it also reinforces the importance of checking out the property content of any REIT very carefully before you buy into it.

When you consider any REIT, read its prospectus or use online research to see its holdings. You want to avoid REITs with a lot of mortgage content (because higher interest rates may make those mortgages risky). You also don't want REITs that have a lot of residential content in high-appreciation locations. (The prices of properties in Florida, California and Arizona could, after all, come down.) And, as I mentioned, you want to avoid health care REITs that are heavily dependent on Medicare revenue.

Investing in health care REITs will, I am confident, be extremely attractive for the long term, provided you avoid Medicare risk. The dividends are attractive. The pricing is good. And the improving performances of many health care REITS may represent an exciting buying opportunity.

Health-Focused Funds

If you prefer funds, the following health care mutual funds and exchange-traded funds should likewise be strong and more diversified over the long term.

Health Care Funds
FUND OR ETF	P/E	PERFORMANCE
		YTD	12-MONTHS
Kinetics Medical (MEDRX)	21.10	4.99%	13.29%
Fidelity Select Pharmaceuticals (FPHAX)	20.70	4.34%	16.95%
Evergreen Health Care (EHABX)	21.80	1.04%	9.76%
Pharmaceutical HOLDRS (PPH)	16.15	1.21%	(1.67%)
Vanguard Health Care VIPER (VHT)	19.00	(3.28%)	(0.23%)
Source: Morningstar

You may be looking at the year-to-date results of these funds and telling yourself you want higher returns. However, this may be precisely the time to buy into these funds if you are a long-term investor. Demand for pharmaceutical and health care products is surely set to rise.

Give some thought to investing in health care stocks and funds if you do not already hold them. The low prices and good ratios of many pharmaceutical and health care issues (but not orthopedic stocks just yet) are dynamite "buy" opportunities.