Johnson & Johnson (NYSE:JNJ), Pfizer Inc. (NYSE:PFE), and Merck & Co., Inc. (NYSE:MRK) are the three largest holdings in the XLV, collectively representing more than 30% of the investment portfolio. On a fundamental basis, health care has historically been considered a defensive sector. The sector also has strong growth prospects and would likely be less affected in the event of a broader market pullback. Valuations are supported by solid dividend yields.
Bank of America’s chief technical analyst, Mary Ann Bartels, believes healthcare is entering a “new bull market” on a long-term technical basis. The sector is breaking out to new all-time highs and she concurs that valuations are still attractive.
Considerations for ETF Trading / Investing
When considering an alternative investment vehicle such as an ETF / ETN, investors need to pay attention to the average daily volume before making a purchase decision. A good rule-of-thumb for retail investors is to ensure that their prospective fund has at least 100,000 shares traded on a daily basis. Otherwise, the bid/ask spread on the market becomes too wide. Liquidity is always important but becomes less critical the longer your duration.
Out of the three recommendations, DRN has the highest risk for numerous reasons. In addition to the triple leverage, investors need to be concerned about time decay. Direxion is able to offer the 3x performance of the underlying index due to the derivatives involved, and this causes the share price to erode over time. DRN also has the lowest average daily volume among the group.
Foolish Bottom Line
In conclusion, I believe AMJ and XLV are clear winners for long-term investment. Energy MLPs and health care are two important areas for portfolio diversification. In contrast, I would exercise caution with DRN, given the risks involved and significant performance we’ve already seen in real estate.
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The article High Risk, High Reward: Jon Najarian’s Top 3 ETF Plays for 2013 originally appeared on Fool.com and is written by John Macris.
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