NEW YORK (TheStreet) -- A reader asked if putting 10% of a portfolio in one sector is prudent. I gave an example on my blog about the industrial sector. It's worthwhile to write something similar about the health-care industry.
A starting point is to decide whether to overweight, underweight or equal-weight the health-care industry compared with a benchmark index like the S&P 500. Currently, health care comprises about 12% of the S&P 500.
The simplest way to invest in health care would be to put the entire 12% into a broad exchange traded fund that invests in domestic, large-cap companies. The Vanguard Healthcare ETF (VHT) does that, allocating 11% to Johnson & Johnson (JNJ), 9% in Pfizer (PFE), 7% in Merck (MRK) and many other familiar names. Many of the ETF providers have a similar fund with a large representation in the biggest domestic health-care companies.
Another approach could include foreign exposure with a fund like the iShares S&P Global Healthcare Sector Fund (IXJ). The ETF is 62% invested in U.S. companies, many of the same names as in the Vanguard fund, but also provides exposure to well-known foreign companies like Novartis (NVS) and GlaxoSmithKline (GSK).One other single-fund solution is a broad ETF that owns only foreign companies, such as the SPDR S&P International Healthcare Sector ETF (IRY). The names in this fund are very similar to those in the iShares fund mentioned above. Putting 12% into just one fund may seem like a lot, but anyone relying on a simple S&P 500 index fund is doing the exact same thing. A broad ETF can also be part of a core/explore type of allocation. In health care, there are very interesting themes, such as stem cell, biotech and others. The health-care sector has subsector funds like the SPDR S&P Biotech ETF (XBI) and the iShares DJ US Medical Devices Index Fund (IHI). A mix that includes a broad-based fund with one or two narrower ETFs can be a good way to add value. Many of the companies positioned to benefit the most from drug discoveries and the like don't have large weightings in the big funds, and it's these segments that provide the best chance for outperformance. Narrower funds provide exposure for people who are uncomfortable with single-stock risk.
Select the service that is right for you!COMPARE ALL SERVICES
Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
24/7 market commentary from Jim Cramer and 20+ veteran Wall Street gurus. Get access to the latest trading ideas on stocks, options, and ETFs as well as a real-time forum to see the pros exchanging their investment ideas.
- Jim Cramer + 20 Wall Street pros
- Intraday commentary & news
- Real-time trading forum
- Actionable trade ideas
All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.
- Real Money + Doug Kass + 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV