2 Smart Ways to Trade Health Care

07/20/2011 9:00 am EST

Focus: ETFS

Health care has been a go-to destination for traders and investors seeking relative safety and yields in a difficult market environment. Here are two prudent and promising ways to tap into the sector.

The past few trading sessions have been plagued with worries, both from abroad and within our own borders. Although the Dow has seen positives, the debt ceiling nerves continue to simmer below.

While investors scrambled to get out of equities, gold has seen a spark of life, as the precious metal hit an all-time high of $1,600 per ounce in intraday trading, pointing to a lack of investor confidence in the current US debt situation.

With the US currently struggling to stay afloat amid the enormous pressure that our $14+ trillion in debt has caused, markets have faltered. Though 2011 started off strong, the past few months have been riddled with political instability in the Middle East, and the debt crises in Europe and on the US homefront, which are aiming to destroy the progress that major equities have made this year.

While many will turn their attention to the government’s next move, earnings season is now underway and will have a significant impact on markets despite what may be happening elsewhere.

Yesterday (July 19) was no exception, as pharmaceutical giant Johnson & Johnson (JNJ) reported earnings from its second quarter of 2011. Johnson & Johnson is one of the largest companies in the country, responsible for many household products like Neosporin, Tylenol, and Band-Aid. The company employs over 118,000 people and operates subsidiaries in approximately 57 countries around the globe.

Here is a recent daily chart:

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Long term, analysts have painted a positive outlook for JNJ. Although the company’s profits dropped 20%, it still beat analyst expectations and sales were up in all three divisions. The company has either met or surpassed its last four earnings reports, giving investors confidence that this strong performance will continue in the future.

Unfortunately, it is unclear how the current state of the economy has impacted the company, so while JNJ may have hit analyst predictions, a foggy outlook based on the overall economic environment may weigh on the stock going forward.

However, the movement after the earnings announcement brought the stock to its 50-day moving average (MA), which could provide support.

Another option for playing the health care sector with a little more diversity in mind is the Select Sector SPDR - Health Care (XLV):

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This product is made up of the biggest pharmaceutical companies in the country, with JNJ leading the way, making up over 12.9% of the portfolio.

Despite 2011 turning sour, this product has managed to return 10.4% to investors while paying out a healthy dividend yield of 1.67%.

See related: 10 Drug Stocks for Safety and Yields

By Jared Cummans, contributor, ETFdb.com

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