Checking the Vital Signs of Healthcare ETFs

Cutting-edge health care is always nice -- but are ETFs tied to the industry good for your financial health?

Given the recent trends of the iShares Dow Jones US Healthcare Provider FundIHF, the iShares Dow Jones US Pharmaceuticals FundIHE and the SPDR S&P Biotech ETFXBI, this question is certainly debatable.

These ETFs have experienced fates that have been comparable to the woes in the broader market. The Healthcare Provider Fund is down 14.7%. The Pharmaceuticals Fund has fallen 10.1%. And Biotech has slumped 13.3% year-to-date.

Am I Covered?

Philip Yockey, President and Chief Investment Officer of Tactical Analytics, an independent private research company, thinks it could be some time before we see a turnaround for the Healthcare Provider Fund.

"Momentum is certainly not in your favor," he said. "It's good if you are looking for bargains, but those aside, I would need a more compelling reason to own it."

The fund's top holdings include UnitedHealth GroupUNH, WellPointWLP, AetnaAET, CignaCI and HumanaHUM.

Jobs data have been mixed lately, but could be one of the major factors to watch when figuring out how the fund might perform.

Eric Bjorgen, Co-Portfolio Manager of the Leuthold Core Investment FundLCORX and the Leuthold Asset Allocation FundLAALX said, "Historically these companies are more profitable when employment trends are strong because it gives them a larger pool of members."

He also noted, "In the short-term the providers could be hurt by a bear market, but our work suggests that healthcare in general looks pretty good right now."

Big Pharma

The Pharmaceuticals Fund is rich with domestic, blue-chip names such as Johnson & JohnsonJNJ, PfizerPFE, MerckMRK, Eli LillyLLY and Schering-PloughSGP.

It is also a commonly mentioned defensive play in volatile markets.

Angela Larson, an analyst for Susquehanna Financial Group, echoes this sentiment: "Historically the pharmaceuticals have been a non-cyclical industry and can be a good place to be in a bear market," she said. "People are still likely to maintain their health."

Despite its defensive characteristics, the fund has had a rocky road as of late. Many of these large-cap pharma stocks are presently sitting near 52-week lows. A pressing challenge for big pharma has been the restocking of pipelines. "They have been struggling to replace the drugs that have been going off patent with new blockbusters at a similar rate," Bjorgen said.

Larson agrees, but cites an example of one company that might be able to reverse this trend. She has a "Positive" rating on Forest LaboratoriesFRX, which is among the fund's top holdings. She believes that Forest's strong cash position coupled with healthy cash flows from operations could allow the company to breakthrough in the R&D arena or make a strategic acquisition before its top-selling anti-depressant, Lexapro goes off patent in 2012.

Biotech

The direction of the Biotech ETF might prove to be more difficult to predict than the other two ETFs. It has top holdings that include CelgeneCELG, GenentechDNA, Imclone SystemsIMCL and AmgenAMGN.

Bjorgen says, "The biotech industry marches to the beat of its own drummer."

Investors should remain patient, but Bjorgen sees ample opportunity for growth in biotech given the recent trend of companies demonstrating the ability to gain approval of new indications for existing drugs. "Biotech has a clear growth advantage over the rest of the healthcare industry," he said.

The disappointing run that biotech has had in recent months has one analyst of the opinion that a couple of this fund's top holdings are trading at value levels. Hamed Khorsand, an analyst with BWS Financial, sees the inability of BiogenBIIB to find a buyer for the company as playing into the hands of value investors.

"The proposed sale of the company may have been bad timing," he said. "The company has a lot of value in its pipeline though." Khorsand has a "Buy" rating on Biogen.

ISIS PharmaceuticalsISIS is another holding of the fund that Khorsand finds to be attractive.

"The company has been very successful in partnering away a lot of the drugs it has produced," he said. "It's trading around $14.50 per share, [but] we think the price of the stock is depressed and could be worth close to $20.00."