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Health Care Funds Suffer Amid Insurer Warnings

Headlines about health care funds catching the flu have been no joke this week for investors.

This week the, biggest U.S. health insurer, UnitedHealth Group (UNH), actually complained that higher-than-expected influenza rates may impact first quarter earnings.

The bottom dropped out for the sector, as UnitedHealth's competitors Humana (HUM) and WellPoint (WLP) cut their full-year forecasts. Two of the largest adverse factors for these companies are rate competition for market share to attract Medicare prescription-drug-plan patients and higher-than-expected medical costs.

A low-interest-rate environment is also a negative to insurance companies, especially as medical-cost inflation routinely outpaces broader measures. Insurers are earning less interest income on the securities they buy with your health-care premium money.

Excluding inverse funds, the average health-care fund we track fell 2.6% for the five trading days ending March 13.

The worst-performing fund this week is the iShares Dow Jones U.S. Healthcare Providers Index (IHF). This ETF lost 11% as holdings of Humana amputated 32% of shareholder value, WellPoint sliced off 31%, and UnitedHealth Group declined 16%.

In second place, the HealthShares Emerging Cancer ETF (HHJ) lost 9.7% for the period. In a breathtaking drop of 88%, the fund's holding in Keryx Biopharmaceuticals (KERX) was severely punished after its diabetic kidney drug failed to pass final-stage trials.

Similarly, Progenics Pharmaceuticals' (PGNX) stock tumbled 64% after its colon drug didn't beat the placebo in a trial.

The third-place fund, Fidelity Select Medical Delivery Portfolio (FSHCX), holds the three health insurers mentioned above, along with Aspect Medical Systems (ASPM), a stock that lost just over half its value this week.

The New England Journal of Medicine reported that Aspect's Bispectral Index System project, used in 60% of hospitals, didn't reduce awareness during surgery as advertised.

Worst-Performing Health Care Funds
Ranked by returns for the week ending March 13

Fund Ticker Rating Fund Type 1 Week Total Return
iShares DJ US Healthcare Providers Index Fund IHF B+ ETF -10.53%
HealthShares Emerging Cancer ETF HHJ E+ ETF -9.72%
Fidelity Select Medical Delivery Portfolio FSHCX C Open-End -9.23%
HealthShares Autoimmune-Inflammation ETF HHA U ETF -8.31%
HealthShares Ophthalmology ETF HHZ U ETF -7.92%
PowerShares Dynamic Healthcare Services Portfolio PTJ B- ETF -7.85%
HealthShares Orthopedic Repair ETF HHP U ETF -6.57%
Healthshares Infectious Disease ETF HHG U ETF -5.90%
ICON Healthcare Fund ICHCX D- Open-End -5.81%
HealthShares Composite ETF HHQ U ETF -5.63%

Source: Bloomberg.
For an explanation of our ratings, click here.

The best-performing list is dominated by biotechnology funds. The king of the hill is ProFunds Biotechnology UltraSector ProFund (BIPIX) at 4.13%. The fund is leveraged 150% to the Dow Jones U.S. Biotechnology Index, allocated to 73% biotechnology and 24% pharmaceuticals.

Both this fund and the third-place fund, Biotech HOLDRs Trust (BBH), have large holdings of industry leaders Amgen (AMGN), Gilead (GILD), Genentech (DNA), and Biogen Idec (BIIB).

Higher-than-expected costs at health-care companies may translate into positive revenue surprises for pharmaceutical and biotech businesses.

UltraShort Health Care ProShares (RXD) gained 4.10% with 200% negative leverage to the Dow Jones U.S. Health Care Index. The fund bets against insurers and medical-delivery stocks such as Humana and WellPoint.

Index member Immucor (BLUD) drained off 20% of stockholder value with the disclosure that the company's acquisition of BioArray may dilute earnings for 2008.

Best Performing Healthcare Funds
Ranked by returns for the week ending March 13

Fund Ticker Rating Fund Type 1 Week Total Return
ProFunds Biotechnology UltraSector ProFund BIPIX C+ Open-End 4.13%
UltraShort Health Care ProShares RXD D ETF 4.10%
Biotech HOLDRs Trust BBH C- ETF 2.76%
Powershares Dynamic Pharmaceuticals Portfolio PJP D ETF 1.08%
AMIDEX Cancer Innovations & Healthcare Mutual Fund CNCRX E- Open-End 0.53%
First Trust AMEX Biotechnology Index Fund FBT D ETF 0.42%
Healthshares European Drugs ETF HRJ U ETF 0.37%
iShares Dow Jones US Medical Devices Index Fund IHI C ETF 0.30%
SPDR S&P Biotech ETF XBI C+ ETF -0.18%
Eaton Vance Worldwide Health Sciences Fund EMHSX D- Open-End -0.21%

Source: Bloomberg
For an explanation of our ratings, click here.

Stay healthy!

Kevin Baker became the senior financial analyst for TSC Ratings upon the August 2006 acquisition of Weiss Ratings by TheStreet.com, covering mutual funds. He joined the Weiss Group in 1997 as a banking and brokerage analyst. In 1999, he created the Weiss Group's first ratings to gauge the level of risk in U.S. equities. Baker received a B.S. degree in management from Rensselaer Polytechnic Institute and an M.B.A. with a finance specialization from Nova Southeastern University.

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