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Health Care – Another Defensive Sector Bites The Dust

Health Care – Another Defensive Sector Bites The Dust
September 25, 2008
By Simon Maierhofer

“What doesn’t kill you makes you stronger” seems to be the new philosophy many American’s live by.

Health care has often been considered a safe-haven in recessionary environments. “People continue to get sick and have to go to the Doctor” was the view on Main Street and Wall Street alike. Along with many other investment strategies, this one seems to heading for the dumpster.

The Health Care Select Sector SPDRs (AMEX: XLV), arguably the most popular health care ETF, is down 14.06% for the year and 25% since May. XLV was outperformed by two of its market cap weighted peers. The iShares DJ U.S. Health Care Sector Fund (NYSEarca: IYH) and the Vanguard Health Care ETF (NYSEarca: VHT) were down only 11.12%.

Once again trailing in performance were the PowerShares health care ETFs. The quant selected Dynamic Health Care Sector Portfolio (AMEX: PTH) was down 14.67%. The fundamentally weighted FTSE RAFI Health Care Sector Portfolio (Nasdaq: PRFH) came in worst in class with its negative 14.92% return. The best in class bragging rights go First Trust with its Health Care AlphaDEX Fund (AMEX: FXH), down 10.98%. >>> How to identify best in class sector ETFs

Insurance companies have had to send out more late notice statements and seen more policies lapse in 2008 than previous years. Follow-up visits, flu-shots and basic “physical maintenance” seem to be taking a back seat to paying rent or putting food on the table.

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Employees of small and mid-sized companies are caught between a rock and a hard place. “Businesses are cutting back on benefits like health insurance”, Gil Chevalier, a health insurance broker in San Diego states. “In essence, employers are saying; you can have a job, but we can’t give you benefits” Mr. Chevalier explains further.

600,000 people have lost their jobs in the past nine months. Most people lucky enough to have health insurance obtain it through their employer. The insurance often covers the spouse and children of the employee. With 600,000 jobs gone, more than a million people may have lost their health insurance.

Jeffrey Rain, Walgreen’s CEO observed that the U.S. is experiencing the tightest prescription market in his 27 year career. The number of filled prescriptions recorded the first negative reading in more than a decade.

Johnson and Johnson (NYSE: JNJ) a diversified global conglomerate and Abbott Laboratories (NYSE: ABT) make up nearly 20% of XLV. JNJ and ABT are both up for the year which means that other constituents of XLV, like Merck (NYSE: MRK) - down nearly 50%, YTD - are getting hit hard.

In recent years we have recommended pharmaceuticals such as the SPDRs S&P Pharmaceuticals ETF (AMEX: XPH) or iShares U.S. Pharmaceuticals Index Fund (NYSEarca: IHE) for our Ready-To-Go Model Portfolios. Pharmaceuticals often start a respectable run around August which lasts until May. The 5 and 10 year average return for this timeframe is around 10%. We will pass on pharmaceuticals this time around.

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Biotech, pharmaceutical's younger cousin, has a whopping 34%, 10 year average return from August to February. The past 5 years have not been as convincing with a 15% return. SPDRs S&P Biotech (AMEX: XBI) is a good option for anyone who wants to play this trend. Despite a 15% correction over the past 40 days, biotech is one of the only sectors that has been able to keep above water this year.

There is one health care ETF that has rewarded investors handsomely. Needless to say, it’s an inverse performing ETFs "with a kick" (double leverage). The ProShares UltraShort Health Care ETF (AMEX: RXD) is up 22.88%. Earlier this year, in June, Rydex launched the Rydex Inverse 2x S&P Select Sector Health Care ETF (AMEX: RHO). So far, RHO trades on thin volume which has resulted in a somewhat erratic performance.

In an environment where most boats sink with the tide, it’s nice to have the ability to buck the trend with short and leveraged short ETFs.

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