NEW YORK (TheStreet) -- The evolution of the ETF industry has lead to the development of funds that are aimed toward tracking various subcomponents of a single sector. For example, while investors can use the iShares Dow Jones Transportation Average Index Fund (IYT) - Get Report to access a collection of airlines, railroads and delivery services, it is also possible to use the Guggenheim Airline ETF (FAA) to specifically target airlines.
The same goes for health care. The
Health Care Select Sector SPDR ETF
tracks a basket of firms hailing from branches of the health care industry including pharmaceuticals, providers and biotechnology. The instant diversification that comes with XLV makes the fund an attractive choice for those looking for catch-all exposure to health care.
Hands-on investors, meanwhile, may find funds such as the
iShares Dow Jones U.S. Pharmaceuticals Index Fund
First Trust NYSE Arca Biotechnology Index Fund
iShares Dow Jones U.S. Healthcare Providers Index Fund
more to their liking.
Aside from allowing investors to develop their own personalized exposure to health care, it is possible to use subsector products like IHE, IHF and FBT to position a portfolio to benefit from various developments such as M&A activity.
In recent weeks, investors have witnessed a spurt of acquisition activity across the health care spectrum. Deals proposed by companies such as
Johnson & Johnson
have grabbed headlines and thrust individual components of the health care industry into the spotlight.
In response to Teva's recent $6.8 billion deal to acquire
, investors may find products such as FBT,
SPDR S&P Biotechnology ETF
iShares Nasdaq Biotechnology Index Fund
In the past, I have looked to FBT and XBI as attractive options for investors who want to track smaller and more volatile members of the biotechnology industry. At the same time, however, investors may find these funds attractive as a way to gain exposure to possible acquisition targets like CEPH.
IBB, on the other hand, combines exposure to Teva and other biotechnology goliaths. Aside from behaving in a more stable manner over time, IBB may prove attractive for conservative investors looking for exposure to companies that are large enough to be acquirers down the road.
Medical devices is another industry that has fallen into focus in light of M&A activity. Last week, Johnson & Johnson announced that it was buying Synthes. When completed, the deal, which is valued at over $21 billion, will rank as the firm's largest-ever acquisition.
As its name implies, the
iShares Dow Jones U.S. Medical Devices Index Fund's
tracks a diverse collection of device-makers. Synthes is not listed within the fund's index. However, it will be interesting to watch IHI components such as
in the coming weeks to see how they behave in light of J&J's dramatic action.
Subsector funds, such as those targeting various components of the health care industry, tend to carry added risk due to their dedication to small corners of the market. However, when utilized in a safe manner, they present risk-tolerant investors with yet another attractive way to utilize the strengths of exchange-traded funds.
Written by Don Dion in Williamstown, Mass.
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At the time of publication, Dion Money Management was long IHE, IHF and IBB.