Health Care SPDR (ETF) (AMEX:XLV)

The health-care market already tops $2 trillion and driven by aging baby boomers in the U.S. its expansion continues, without getting affected by the ups and downs of the overall economy. Though the market looks sound, most of the stocks in the sector are in a strong uptrend and due for correction, taking the temperature off the health care sector.

Endorsing the same, HealthCare Select Sector SPDR (XLV) tracks a concentrated index of the health-care stocks in the S and P 500 index, owning around 55 stocks and packs 60% of its money in its top-ten holdings. XLV is heavily reliant on US-based mega-cap stocks in the sector, particularly pharmaceutical stocks such as Johnson and Johnson, Pfizer, which together makes up for one-fourth of the fund’s portfolio.

Lately, some of the fund's top holdings have been hit with patent problems, thin product pipelines, regulatory uncertainty, and product recalls. Merck is still facing litigation for its Vioxx painkiller owing to potentially deadly side effects and Pfizer is struggling to provide substitute for blockbuster drugs that are about to lose patent protection in coming years, with recently ceasing development of a cholesterol drug for which it had high hopes.

The concentration and uncertainty make this fund more risky. Its one-year returns as of December 2006, is 7.1% as against 15.79% reported by the Standards and Poor index. Also it has lost money in about half of the 32 calendar quarters since its inception with the typical health-care fund losing money in only 38% of those same periods. Though its expense ratio of 0.24% makes it a cheap option, Vanguard Health Care ETF, with a broad diversification gives a tough competition to XLV.