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How Health Care ETFs Can Strengthen Your Portfolio

Stocks in this article: IBB XLV SPY FXH

NEW YORK (FMD Capital Management) -- Health care has been on a major hot streak for well over a year now. The combination of our aging population and strong demand for medical services has boosted the prices of health care stocks to fantastic levels. When you think about the path of Obamacare, shifting demographic trends, and future innovation in drugs and procedures, it becomes clear that the outlook in this sector is very bright.

There are a variety of ways that you can capitalize on the rising trend of health care companies in this country. Many people prefer to choose individual stocks because of their research and belief in a specific businesses outlook. My preferred choice is to select a basket of stocks that offer access to a wide swath of industries that are focused in multiple areas.

There is no easier way to do this than through a low-cost exchange-traded fund. However, picking the right exchange-traded fund is all about understanding the underlying holdings, fees, and index construction in order to successfully navigate this crowded field. It is important to understand what you own and how it will adapt to changing market conditions.

The most widely held ETF in this sector is the Healthcare Select Sector SPDR (XLV), which contains 56 large-cap companies primarily engaged in the pharmaceuticals, biotechnology and medical provider fields. XLV controls nearly $9 billion in total assets and charges a modest expense ratio of just 0.16%. In 2013, this ETF gained 41.21%, which handily beat the 32.13% return of the SPDR S&P 500 ETF (SPY).

XLV is probably one of the easiest ways to get broad-based exposure to the health care sector in a very liquid vehicle. While the ETF is not overly diversified, it does give you exposure to a variety of industries within the health care sector that offer their own unique characteristics. Over the last year this sector has been increasingly low in volatility and high in total return.

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