Health Care's Been the Big Winner, but Can You Assume the Risk?

Health care funds are far and away this year's top-performing pack, but buying a chart topper might be biting off more risk than you can chew.

Because sector funds focus their investments on one industry or even a thin slice of it, they're often feast-or-famine performers. This year health care funds have been feasting. So far they're outperforming every other fund category, up more than 50%, compared to a 7.2% dip for the S&P 500 , according to Morningstar.

Health Care's Year Health care has been the sector to beat this year.
	Avg. Health Care Fund	S&P 500
YTD Return	50.2%	-7.2%
1-Year Return	70.3	-1.6
5-Year Return	22.1	19.3
10-Year Return	21.1	18.1
Source: Morningstar. Annualized performance figures through Nov. 15.

But all health care funds are hardly alike. As sector-fund investing has become more popular, fund companies have diced the sector into thin slices to stand out from the crowd. Now in addition to funds that spread their money across the sector, there are funds that focus on the biotech, genomics and medical-delivery industries. Because these funds are even more dependent on a thinner band of health care stocks, they're even more risky than the average health care fund and usually land at the top or bottom of the category.

Today, biotech-heavy funds are top dogs because cutting-edge drug makers' shares have sizzled of late. Over the past year the American Stock Exchange Biotechnology Index is up more than 140%, according to Baseline. Consequently, if you use today's scoreboard to shop for a health care fund, you're probably buying what is essentially a biotech fund, along with a slew of risk. Only five health care funds have topped their average peer over the past one- and three-year periods, and each is either a biotech fund or carries a healthy dose of biotech stocks in its portfolio.

Leading Health Care Funds These funds are the best performers in a very hot sector
Fund	1-Year Return	3-Year Annualized
(MFHAX Quote)Munder Framlington Healthcare A	172.8%	39.4%
(FBDIX Quote)Franklin Biotech Discovery*	136.6	44.7
(DGHCX Quote)Dresdner RCM Global Health Care	114.3	40.0
(ETHSX Quote)Eaton Vance Worldwide Health Sci A	99.9	39.5
(FBIOX Quote)Fidelity Select Biotechnology	75.6	46.8
Avg. Health Care fund	70.3	25.0
S&P 500	-1.6	13.8
Source: Morningstar. Annualized performance figures through Nov. 15. *Currently closed to new investors.

If you're looking for access to biotech, poke through these funds. If you're a no-load investor, check out (DGHCX Quote)Dresdner RCM Global Health Care. If you don't mind paying a 3% maximum front-end load , or sales charge, check out (FBIOX Quote)Fidelity Select Biotechnology -- the firm's sector funds are typically strong performers thanks to its strong bench of analysts. If you work with a broker, check out broker-sold (ETHSX Quote)Eaton Vance Worldwide Health Sciences -- broker-sold (FBDIX Quote)Franklin Biotech Discovery fund is closed to new investors.

But keep in mind that the mercurial sector is due to cool -- making these funds a potentially risky bet. After all, between 1993 and 1996 the Amex Biotech Index lost 3.3%.

A look at the cumulative top-10 holdings of these leading funds shows their biotech focus. All 10 stocks are either classified as biotech or pharmaceutical shops and include none of the industry giants like Merck (MRK Quote), Pfizer (PFE Quote) or Bristol-Myers Squibb (BMY Quote).

Under the Hood The stocks with the biggest weighting in the combined portfolios of the 10 above funds
Stock	Weighting in Top-10 Funds	Number of Top-10 Funds Owning the Stock
MedImmune(MEDI Quote)	2.3%	4
Amgen(AMGN Quote)	2.2	3
Immunex(IMNX Quote)	2.0	2
Chiron(CHIR Quote)	2.0	3
IDEC Pharmaceuticals(IDPH Quote)	1.8	3
Genentech(DNA Quote)	1.8	4
Abgenix(ABGX Quote)	1.7	4
Inhale Therapeutic Systems(INHL Quote)	1.7	4
Sepracor(SEPR Quote)	1.6	4
Alza(AZA Quote)	1.5	3
Source: Morningstar. Holdings as of funds' most recent portfolio reports.

If you're looking for a broader health care fund you have options, but not at the top of the charts. Perhaps the best is (VGHCX Quote)Vanguard Health Care -- the $16.7 billion no-load fund run by guru Ed Owens. Despite the fund's girth it has a solid track record. During the past three-, five- and 10-year periods the fund beat more than 75% of its peers.

Another option is the (FSPHX Quote)Fidelity Select Health Care fund, which carries a maximum 3% sales charge. Here you get access to Fidelity's research acumen but with a broader portfolio of health care stocks.

If you work with a broker, you might check out (PHSTX Quote)Putnam Health Sciences Trust and (MAHCX Quote)Merrill Lynch Healthcare, two broker-sold funds with broad portfolios that have lagged their biotech-fed peers over the past couple of years.