Home > Stock Analysis

Healthcare's Balanced ETF

Posted: Oct 06, 2008 09:32 AM by Gregory S. Davis

Tickers in this Article: PTH, XLV, SPY, BRL, AMGN, RYH

Developing a game plan when investing in healthcare can be a daunting task. Searching for intrinsic value between pharmaceutical makers, biotechnology companies and healthcare providers can lead investor to travel in multiple directions at once. One healthcare ETF that is low on favoritism and high on diversification may be well suited to help investors limit their search for their healthcare portfolio.

Get Free Stock Analysis By Email

Balancing Act
The Rydex S&P Equal Weight Health Care ETF (AMEX:RYH) is down 12% since the beginning of the year, but its return is several percentage points above the -22.74% return of the SPDRS S&P 500 Index ETF (AMEX:SPY). The RYH uses quarterly rebalancing to maintain an equal weighting in its underlying portfolio of healthcare companies found in the S&P Equal Weight Health Care Index. A brief review of a pair of RYH's top performers explains why the ETF has not fallen as much as the S&P 500 Index.

Generic Drugs
In July, the $2.5 billion (in revenue) generic drug marker Barr Pharmaceuticals (NYSE:BRL) agreed to be acquired by its $9.4 billion competitor Teva Pharmaceuticals (Nasdaq:TEVA). Barr's success as a leader in female healthcare, oncology and cardio vascular therapies attracted Teva to its portfolio of drug offerings. Barr's leading drug is its generic oral contraceptive Ocella. Barr's business will expand Teva's geographic reach and its product line beyond its current focus on neurology and respiratory treatment. The acquisition is expected to close by the end of the year. BRL is up about 20% since the beginning of the year. (To learn more about acquisitions, read Analyzing An Acquisition Announcement).

Biotech
The $14.8 billion Amgen (Nasdaq:AMGN) is led by the sale of its Aranesp and Epogen drugs used for the treatment of anemia (deficiency of hemoglobin in the blood). Aranesp is used to support cancer care and nephrology (kidney disease) while Epogen is used in support of chronic renal failure. Anemia is a common side effect of chemotherapy, but the use of drugs to treat the condition has come into question by an FDA advisory committee.

While Aranesp continues to be one of the world's top 20 selling drugs total, sales decreased 12% from the prior year to $3.6 billion in 2007. Amgen was recently successful in defending its patent protection against Roche Pharmaceuticals, which offers some protection for Amgen's profits, but concerns of Anemia drug uses is an issue investors should follow. The stock is up about 27% since the beginning of the year.

Options
There are other healthcare ETFs to consider, including the SPDR Select Sector Health Care (AMEX:XLV) and the PowerShares Dynamic Healthcare ETF (AMEX:PTH). The XLV fund has come closest to the return of RYH by posting about a -12.5% return year to date, while PTH has lagged returning about -20%.

Final Thoughts
When in comes to healthcare investment, the field of choices is plentiful, but it appears that a diversified approach with an automatic rebalancing feature may be the best way to go for investors building their healthcare portfolio.

To learn more, see Special Feature: Exchange-Traded Funds.

By Gregory S. Davis

Gregory S. Davis is an investment writer and consultant for his company G.Davis Capital Inc. His core methodology for choosing investments include patience, diversification and asset due diligence. Gregory is a graduate of the Wharton School of Business. He is also a board member of StoriesWork, a non-profit organization based in Durham, NC that uses storytelling to empower youth and individuals to utilize alternative dispute resolution tactics.

Rate this Article: Your Rating: Overall Rating: Vote Now!

MORE STOCK ANALYSIS