Health Care: Why Devices (IHI) Are Safer Than Drugs (IBB)

Many scientists explain the origins of humankind using the "Big Bang Theory." From what little I can remember... a tremendous, cosmic explosion occurred about 10 billion years ago to create the universe we currently observe.

A more "down-to-earth" theory involves the current aging of the baby boom population. Demographic economists explain that the massive number of retirees in the U.S. and their projected longevity create the explosive opportunity for investing in health care.

Investing in biotech and/or generalized health care has not exactly panned out yet. The chart below shows relative underperformance for Vanguard Health Care (VGHCX). Meanwhile, biotech's Nasdaq Biotechnology Index (IBB) has been far riskier than a simple investment in the market's S&P 500 SPDR (SPY).

Might one conclude that the "Baby Boom Theory" is somehow lacking in merit? Not so fast!

The population is indeed aging. And the need for health care products/services is definitely expanding... much like the universe. However, investors need to be more selective about the winners and losers in the competitive landscape.

Let's take a step closer. For example, far too many people are quick to jump on the drug bandwagon. Yet there's boundless litigation, lengthy FDA approval process and scores of competitors... not to mention a major push towards socialized medicine. None of these trends bode well for the profitability in the drug development arena.

In contrast, the aging of baby boomers plays into angioplasty, knee replacements and cosmetic procedures. Moreover, the technology involved in the employed devices can fetch higher prices with less government interference.

It gets better. The iShares Dow Jones U.S. Medical Devices Fund (IHI) recently surpassed its 52-week high. Can you say, "What subprime mess/credit crunch?"

Right now, I lean towards IHI over other health care proxies like the Nasdaq Biotechnology Fund (IBB) or Vanguard Health Care's exchange-traded fund (VHT). In the near-term, you've got less volatility and less downside risk. Over the longer-term, the iShares Dow Jones U.S. Medical Devices Fund (IHI) is equally viable as any health care investment currently capitalizing on the boomer trend.

Disclosure Statement:  As a Registered Investment Advisor, Pacific Park Financial, Inc. may hold positions in the ETFs, mutual funds and/or index funds mentioned above. Investors who are interested in money management services may visit the Pacific Park Financial, Inc. web site.