The uncertainty over the future of health care has exacted a toll on the industry. ETFs like iShares Dow Jones US Healthcare Provider ( IHF), Pharmaceutical HOLDRs ( PPH) and iShares Biotechnology ( IBB) all will be affected differently by changes in legislation. One fact remains indisputable, however: America is getting older. As baby boomers reach old age, health care costs are expected to skyrocket. Whether or not new legislation transforms our existing system, costs likely will rise over the long term. Picking individual drug companies or health care providers can be a tricky business, as outside factors like drug trials, lawsuits and legislation can weigh on results. ETFs are an effective way to mitigate the risk of investing in a single health care company by exposing investors to a basket of securities, rather than a hit-or-miss pick. The three main categories of health care ETFs are pharmaceutical, health care provider and biotechnology. Other, more specialized ETFs like iShares Dow Jones U.S. Medical Devices Index Fund ( IHI) and international funds like WisdomTree International Health Care Sector Fund ( DBR) offer different perspectives. Health care providers could have the most to lose in the battle for America's health care. iShares Dow Jones US Healthcare Provider ( IHF) plummeted more than 40% in 2008 as investors tried to estimate the extent of health care reform. Top IHF components like UnitedHealth Group ( UNH) and Medco Health Solutions ( MHS) could be dramatically affected by a large shift toward a government "option" program. Health care price regulation could promote the use of generics at the expense of the pharmaceutical industry. Generic drugs have become more prevalent in recent years and have eaten into the profits of some of the large drugmakers. Pharmaceutical HOLDRs includes drugmakers like Abbott Labs ( ABT) and Bristol-Myers Squibb ( BMY).
The health care subsector that would likely be the least affected by government price controls is biotechnology. An increase in government regulation of health care industry prices likely would cause health care stocks to take a hit across the board. Many of these sectors may already be oversold, however, in anticipation of legislation. Betting on the direction of individual stocks or even subsectors in the health care sector seems risky during such an uncertain political climate. Investors should look to the long term and consider what American health care will look like after the dust settles. The undeniable truth is that America is aging, and when supply meets demand, the health care sector will continue to grow. Long-term investors are better off with health care ETFs and resistant subsectors within the industry.