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While the inability of Congress to form a consensus on how to change the current healthcare system seems to indicate a lack of appealing options for reform, investors are fortunate to have a wide variety of vehicles available to gain exposure to the healthcare sector, which seems poised for long-term growth.
In fact, healthcare is one of just three sectors that Standard & Poor’s Equity Strategy recommends investors overweight in their portfolios (the others are information technology and industrials), and S&P equity analysts have a positive outlook for the healthcare sector based on positive fundamental outlooks for the pharmaceutical, biotechnology, and managed care industries, which together represent about 75% of the sector.
There are about two dozen exchange traded funds that offer a wide variety of exposures to the sector, including broad-based, global, and leveraged ETFs, as well as those targeting individual industries.
Among broad-based healthcare ETFs, one choice is the Healthcare Select Sector SPDR Fund (XLV; overweight). It is the oldest, the largest, and the cheapest to own, and it holds the best one-year and three-year track record among all healthcare ETFs, whether broad-based or industry-specific. One drawback, however, is that because it tracks a market capitalization-weighted index, the fund’s three largest holdings are pharmaceutical manufacturers Pfizer [PFE ****], Johnson and Johnson [JNJ ****], and Merck [MRK ****]. Those companies feature prominently in healthcare ETFs targeting the pharmaceutical industry, as well as other large-cap or broad-market ETFs and mutual funds that are based on market capitalization -weighted indexes, so the potential for overlap with other holdings is large.