Health Care Fund Loses 'Defensive' Quality

It has been anything but a year of wellness for health care providers.

The iShares Dow Jones U.S. Healthcare Provider Fund (IHF) has fallen 47% so far this year, more than the S&P 500's 32% decline.

The ETF returned 18.3% in 2007 vs. 5.5% for the S&P 500. The underperformance was unexpected in 2008, in light of the fact that many investors sought out less-risky asset classes as the year unfolded. Historically, an investment in health care would have sounded like a good place to be, given its defensive nature. This notion has proven to be anything but the case.

IHF, whose top holdings include UnitedHealth Group(UNH), WellPoint(WLP), Medco Health Solutions(MHS), Aetna(AET) and Humana(HUM), ran into trouble early on in 2008.

In March, WellPoint slashed its full-year forecast due to higher-than-expected medical costs. Humana followed the lead two days later while blaming revised projections on the performance of its Medicare Part D plan. In April, UnitedHealth continued the trend when it reported its first-quarter results. Unusually high influenza costs and a decline in membership for its risk-based commercial markets products were cited as contributing factors to a downward revision in its full-year outlook.

IHF's slide raises the issue as to whether the ETF is a bargain or value trap. It's now trading at $39, down from its 2008 high of $64.

"We put a 'sell' rating on it when it broke below $59 in January," said Philip Yockey, president and chief investment officer of Tactical Analytics, an independent private research company. "Right now you are at a price that you only see 5% of the time. Either it's cheap or something has fundamentally changed."