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Healthcare sector exchange traded funds are holding on to slim gains for 2011 but could be volatile the rest of the year after a federal appeals court ruled the individual mandate in the Obama administration’s healthcare reform plan is unconstitutional.

Health Care Select Sector SPDR Fund (NYSEARCA:XLV) is up 1.4% year to date, compared with a 5.1% loss for the S&P 500.

Health care is typically a defensive sector investors can use for their portfolios when the markets and economy are in turmoil. Overall, the sector is not as economically sensitive compared to the broad market, according to a profile of the healthcare ETF from investment researcher Morningstar.

“In our view, an ETF can help health-care investors diversify away company-specific risks. Granted, all health-care firms face the risk of Congress changing the rules — that is, Medicare reimbursement, nationalized health care, or stricter FDA guidelines — which could potentially hurt all stocks here to some degree,” according to the report.

The healthcare plan initiated by President Barack Obama looks like it will have its fate decided by the Supreme Court after rulings from appeals courts, reports David Jackson for USA Today.

Separately, as the patents for major prescription drugs are set to expire in the coming year, generic drug competition has ramped up.

Pfizer (NYSE:PFE), the world’s largest drug maker, reported second quarter profit that beat analysts estimates, as sales of pain medicines offset lower revenue from expired patents. The drug company is working on an over-the-counter version of Lipitor as the patent set to expire in November. Pfizer is the second-largest holding in the healthcare ETF at 11.4% of the portfolio.

Health Care Select Sector SPDR Fund

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Tisha Guerrero contributed to this article.

Disclosure: None

Source: Healthcare ETFs Cling to 2011 Gains