How to Hitch Ride on Health-Care Investing

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.

From there, any combination of individual stocks and ETFs can allow for blending different volatilities by including some mega-cap exposure and perhaps a go-for-broke stock like Dendreon ( DNDN) or different countries. Generic drug company Teva Pharmaceuticals ( TEVA) is the largest company in Israel, for example. An investor could be comfortable with individual domestic stocks but prefer an ETF for foreign exposure.

Any combination that includes ETFs means looking under the hood. If too much exposure to Switzerland is objectionable, the SPDR S&P International Healthcare Sector ETF is probably out due to its 23% weight in that country.

Beyond that, allocating portfolio space to themes, countries and individual stocks will mostly boil down to time available to spend on the task.

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At the time of publication, Roger Nusbaum had positions in JNJ, IXJ, NVS and TEVA for clients.

Nusbaum is a portfolio manager with Your Source Financial of Phoenix, and the author of Random Roger's Big Picture Blog. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Nusbaum appreciates your feedback; click here to send him an email.

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