Is Now the Time to Invest in Health Care ETFs?

Health care exchange-traded funds: the bran muffin on your investment menu.

Health care investments are just what the doctor ordered if volatility is what ails your portfolio. Analysts agree that demographics buoy the long-term prospects for health care, as the aging U.S. population will increasingly need care of all sorts. In developing countries, health care infrastructures are rapidly being built. Innovation shows no signs of stopping, with expanding pipelines of new products, drugs, devices and technology.

Sweeping changes in health care policy and rising employment mean more people have health coverage. More coverage means more utilization of health care services at every point on the spectrum, from over-the-counter drugs to specialized home care and therapy.

ETFs are a cost-efficient way for investors to get in on all of this growth. Robert Goldsborough, manager, research analyst and ETF specialist with Morningstar, lists Health Care Select Sector SPDR Vanguard Health Care ETF as top picks for the category.

[Read: How to Budget for Health Care Expenses in Retirement.]

Keep in mind, however, that because health care is so robust, it's not as overvalued as some other sectors and is considered less likely to face a correction. If this sector appeals to you, you'll probably not gain by waiting for a temporary drop in valuations. "This is not a bargain-hunting situation," Goldsborough says.

Although U.S. consumer utilization of health care service has not entirely rebounded from its prerecession levels, other trends have converged to power health care growth, Goldsborough says.

Health care trends are somewhat independent of overall economic conditions, he adds. That means even if the U.S. economy takes a dip, the health care sector is likely to be less affected, thus stabilizing portfolios. "Health care tends to perform well when the market is down," says Neena Mishra, director of ETF research for Zacks Investment Research. Meanwhile, health care was the best-performing sector in the second quarter of this year, she points out.

Here are some of the underlying factors analysts say are behind that performance.

Pharmaceutical companies chronically complain about the burdensome regulatory process for new drugs, but the pipeline has become more efficient, opening the way for a steady introduction of new products, Goldsborough says. "The regulatory environment is more favorable than it has been," he says. "We've had new development in several areas, plus pharmaceutical companies have been buying biotech startups. The drug development is surprisingly strong."

Mishra is a fan of the pharmaceutical subsector because the product and profitability life cycle for new drugs is relatively long -- and there's plenty in the pipeline. Her recommendations for this subsector are PowerShares Dynamic Pharmaceuticals ETF and iShares US Pharmaceuticals ETF.

[Read: Everything You Need to Know About Exchange-Traded Funds.]

On the other hand, the medical devices subsector would seem to be equally stable, but it isn't. If you are analyzing the holdings of an ETF, look hard at its proportion of device manufacturers, because their sales are sometimes tied to elective surgery and treatments, Mishra says.

Developing countries are also driving health care growth for international companies, Goldsborough says. Pharmaceutical and device firms are likely to have strong sales in China for the next seven years, given that country's population and health infrastructure growth.

Health care ETFs are a smart way to enter the sector because there are plenty of funds that offer diversified exposure, says Josh Emanuel, chief investment officer of the Elements Financial Group LLC. Health care fund performance is driven by the results of individual stocks -- not just a general market lift. That validates the stability of the sector, Emanuel says.

If the sector is so wonderful, why not assemble your own basket of health care stocks? Because there are still some underperformers, Emanuel points out, such as GlaxoSmithKline, which trails sector leader Amgen by 25.5 percent so far this year. "That's important because stock selection is a huge factor if you buy individual companies," he says.

[See: 7 Ways to Take Advantage of Your 401(k).]

Picking winners in the biotechnology subsector is best left to experts who understand the many factors that go into growth potential, from technical development to patent and regulatory approvals to testing to market launch.

Even the low fees of an ETF include transaction costs and the expense of rebalancing the fund. If you assemble your own health care portfolio, you have to pay for transactions and rebalancing on your own. And that's assuming you have enough money to buy "meaningful" amounts of each company you want, Emanuel adds.

Some investors say, "Why should I pay a fee for a passive ETF?" Well, you're paying the fee because you're not paying the transaction costs, and you're getting diversification.

"Health care is where you go for yield -- along with telecom," Emanuel says. "Over time, health care has never been the source of a bull market or the cause of a bear market."