HealthShares ETFs: Diagnostics Appears a Winner

XShares launched 19 ETFs in the health care space this year. Each of these ETFs, called "HealthShares," focuses on an exceptionally narrow field like metabolic disorders, opthalmology and auto-immune deficiency.

Considering the quick rise in sales volume of hundreds of new ETFs, the results for HealthShares so far has been quite dismal. It would appear that my early skepticism in the springtime was warranted. Six months down the road, however, I thought I'd take a second look.

HealthShares have nearly $100 million in assets spread across the 19 narrowly-defined ETFs. And yet, only one commands enough volume to draw me closer. HealthShares Diagnostics (HHD) has a full 1/3 of the assets.

HealthShares Diagnostics (HHD) invests in healthcare, life sciences or biotechnology companies that are engaged in the identification of the existence and extent of a disease, the visual localization of a disease, the selection of therapeutic agents for a disease and the monitoring of disease progression. In other words, "diagnosis" is "disease management" from onset to vigilance.

Not only has HealthShares Diagnostics (HHD) acquired the lion's share of assets, but its performance throughout the summer correction as well as its performance during the current market struggles is rather impressive. A quick glance at the chart below gives insight into the defensive nature of this sub-segment of health care as well as the profit potential.

Whereas the S&P 500 Trust (SPY) dropped 9% from 7/12/07 to 8/15/07, whereas the iShares Russell 2000 Small-Cap Index (IWM) sank 11.3% in that same time frame, HealthShares Diagnostics (HHD) actually posted an astonishing gain of 2%! And that was a period when virtually nothing worked.

Granted, HealthShares Diagnostics (HHD) was not immune this time around. It did drop 8%... peak-to-trough. Nevertheless, that was less of a drawdown than either the S&P 500 or the Russell 2000.

Bottom line? I'm not a big fan of the slice-n-dice family of HealthShares. But I am convinced that HealthShares Diagnostics (HHD) may be a worthy candidate for a diversified portfolio.