investment advice

**Broken Arrow** · 09-23-2010, 04:38 AM

The trouble with pharma is knowing their R&D and pipelines... and that's just too speculative for me.

I prefer healthcare retailers such as CVS (CVS) or Walgreen (WAG). They're technically retail stocks, but they are not dependent on any one proprietary pipeline, they don't have to worry about the testing phases, FDA approval, or any potential mass-recalls damaging the stock later on. They just sell the medicine.

If you still want pharma, I think TEVA (TEVA) is a pretty good bet. They are one of the world's largest generics manufacturer. In my opinion, generics is arguably the best way to buy into pharma.

Pfizer is pretty good if you insist on a stable brand-name pharma with a pipeline.

Intuitive Surgical (ISRG) if you want to go with hospital instruments.

I'm sure there's more, but that's all I can think of off the top of my head....

One last thought: What about just buying a healthcare ETF like VHT? It holds most of the big names, and the current yield is 3%. Honestly, healthcare is a very big playing field, and unless you have a very specific area you're trying to focus in on, I would probably just buy the sector ETF and call it a day.

Hope that helps anyway.

**KTP** · 09-23-2010, 05:07 AM

Originally posted by Broken Arrow View Post

One last thought: What about just buying a healthcare ETF like VHT? It holds most of the big names, and the current yield is 3%. Honestly, healthcare is a very big playing field, and unless you have a very specific area you're trying to focus in on, I would probably just buy the sector ETF and call it a day.

Hope that helps anyway.

Thanks BA. The problem (I think) with a ETF is that it will generate short term capital gains all over the place as it moves in an out of different stocks? Or is this not true? We are in a pretty dang high tax bracket that may go higher when Washington decides the middle class needs a little soaking also. I would prefer to own individual shares where possible so that I am in control of when or if I take capital gains. Or am I totally missing how ETF works?

I will look into TEVA and ISRG and see if they are stable with a good cash flow like Pfizer.

**Broken Arrow** · 09-23-2010, 05:25 AM

Good questions!

Originally posted by KTP View Post

The problem (I think) with a ETF is that it will generate short term capital gains all over the place as it moves in an out of different stocks?

Well, that's not something you have to worry about. The fund manager handles that, and that cost is passed down to you as a part of the fund's expense ratio. You only have to worry about that when you sell the fund itself.

Also, it's an index ETF, and according to the prospectus (PDF), the turnover rate is only 5.6%.

Dividend payout is annual, which makes payout tracking about as easy as it gets....

But don't get me wrong. You know I typically don't promote sector ETFs over individual stocks, and as always, feel free to do what you want. But in this particular case, I don't think a sector ETF is that bad of an idea....

**KTP** · 09-23-2010, 05:33 AM

Oh, ok, so it is more of a index fund. I do see from the prospectus that it does do short selling, so not *exactly* a true index?

The fee is 0.25% so that is not bad (although I get 100 free trades a year in my Wells Fargo trading account and I only use about 10, so I could set up my own index with no fee if I prefered).

The 5.6% turnover doesn't sound too bad. It doesn't sound like they are daytrading inside the fund or anything

I find the top three holdings interesting:

Johnson & Johnson 11.6%
Pfizer Inc. 8.2
Merck & Co. Inc./NJ 7.6

I already own $20K of JnJ and Pfizer was on my radar as well as Merck.

edit: Wait, I just reread your response: "You only have to worry about that when you sell the fund itself."

Is this true? I thought transactions inside a fund that generate capital gains flow directly through to the fund investors each year, even if you don't sell the fund shares that year?

**Broken Arrow** · 09-23-2010, 05:41 AM

Oh, ok, so it is more of a index fund. I do see from the prospectus that it does do short selling, so not *exactly* a true index?

I don't know enough about it to answer your question. I would call them up and ask....

Wells Fargo trading account

How long have you had it, and how is that working out for you? Is that just for stocks and ETFs, or can you buy bonds and options as well?

I find the top three holdings interesting:

Yeah, I liked the look of the top ten holdings as well, which is why I didn't mind making the sector ETF suggestion this time around. If you had asked me about the energy sector, for example, and if BP is one of the top ten holdings, then I wouldn't feel comfortable enough to suggest that ETF. Or financials. I guess it depends.

If I was in your position (and I realize that I am not), I would just sell all my healthcare related stocks (tax hit permitting) and just go with something like a sector ETF. You still get the exposure you want (assuming you like the holdings) and it just makes your investing life simpler.

Keeping it simple isn't always bad.

**KTP** · 09-23-2010, 05:59 AM

Well now I just found out about:

VANGUARD HEALTH CARE FUND(VGHCX_) Managed by Edward P. Owens since 1984 and Jean M. Hynes since 2008; total assets of $18.6 billion; expenses of 0.36%; minimum initial investment of $25,000.

This is an actively managed fund vs the VHT, but the expense ratio isn't that different.

What is your take on VGHCX vs VHT?

**Broken Arrow** · 09-23-2010, 07:09 AM

Well... VGHCX has a minimum balance requirement of $25k.

The dividend yield is lower, at 1.75% versus VHT's 2.93%.

The expense ratio is a little bit higher, at 0.36% versus VHT's 0.25%.

On the upside, it does appear to reduce risk slightly, with a Sharpe ratio of -0.11 versus VHT's -0.21.

It's also a tiny bit less volatile, with a standard deviation of 17.18 versus VHT's 17.53.

Finally, VGHCX has an impressively low turnover rate of just 6% (versus VHT's 5.6%). Not bad at all for an actively-managed fund.

On top of that, the 5-year return is 3.73% versus VHT's 1.73%.

Hmm! If you don't mind the $25k minimum requirement, and assuming it can keep up its performance, I say that's a pretty good looking fund! Basically, I think VGHCX is preferable if you're looking for fund performance, whereas VHT is better as a dividend play. What you prefer is entirely up to you, but that's my impression of it.

One last thing I want to note: This is a classic mutual fund, so it's subject to the usual selling restrictions, whereas VHT is an ETF you can liquidate immediately. It might not be a big deal, but I don't know what your investing or trading strategy is here, so I thought I'd point that out.

**KTP** · 09-23-2010, 07:59 AM

Well, I looked over the funds a bit more and decided to just buy the better looking, higher dividend, more stable holdings in their portfolio.

I started today with the top holding in VGHCX, Merck. I bought $10K at $36.59 and it is paying a 4.1% dividend. I will add LLY (5.4% dividend) and some of the others when the cash from the grant sale clears. Yes, it is more work than just buying VGHCX or VHT but my expense ratio is 0.00%, which is hard to beat. Also, I control when capital gain events happen. I will probably end up with about 25 blue chip stocks across all sectors, including healthcare, so it shouldn't be too hard to manage. I am sure I will miss out on the huge gains from smallcaps, but hopefully the dividends will make up for that (maybe they will extend the nice treatment of dividend taxes!)

Edit: So how to I get all of my stocks to stop sending me the bulky paper voting pamphlets and prospectus material? I would rather just have an extra 0.001% on my dividend than all of that printed material which just goes to the garbage. I tried signing up for online delivery of all documents from Wells Fargo investments, but I still get all of these voting things and other stuff all the time.

**Broken Arrow** · 09-23-2010, 09:19 AM

Originally posted by KTP View Post

Well, I looked over the funds a bit more and decided to just buy the better looking, higher dividend, more stable holdings in their portfolio.

Haha, well yes, that is another way to approach it, and not necessarily a bad one for DIYers.

Yes, it is more work than just buying VGHCX or VHT but my expense ratio is 0.00%, which is hard to beat.

That's true, and it's something that I kind of like as well. Although, to be fair, we are normally saddled with trading fees as well, although in your case, you are not since you're going through Wells Trade.

And by the way, how is that working out for you? I've been watching that for a while, and if it's as good as it sounds, I might switch to get the free trades.

I am sure I will miss out on the huge gains from smallcaps, but hopefully the dividends will make up for that (maybe they will extend the nice treatment of dividend taxes!)

Well, I'm sure you know this already, but for others reading, it's generally not a good idea to chase after dividend stocks for income, due to volatility and principle risk. If you want to do that, it might be better to buy individual bonds. At this point, it's also not unreasonable to find some corporate bonds that pay as much as 5% annually.

But if your strategy is a mix of income and growth, then good dividend stocks isn't a bad idea. Speaking of which, another one I like is Waste Management (WM). Yeah, it's not sexy, but it's stable, pays well, and it's not going away anytime soon.

Here's an interesting twist I am doing lately. I'm selling covered calls for income. Because it's options trading, you get an extra layer of complexity and risks, but being what it is, it's still relatively safe way to trade. And the tradeoff for taking on the risks is that you can average about 2% to 4% income each month. Personally, I like this approach better than just holding stocks.

Edit: So how to I get all of my stocks to stop sending me the bulky paper voting pamphlets and prospectus material?

Same here.

When you figure that out, please let me know.

**KTP** · 09-23-2010, 09:31 AM

Wells Trade or whatever they call it seems to work for me. I don't really understand why they give me 100 free trades every year, but I have been taking advantage of it for almost 2 years now and it seems legit. I guess one day they will stop doing the free trades which will make it harder to add to my 25 stocks. Hopefully by that point each selection will be many tens of thousands of dollars and a $7 trade fee won't seem too painfull. I don't tend to day trade at any rate...I am holding these for at least 10 years.

**feh** · 09-24-2010, 09:29 AM

Originally posted by Broken Arrow View Post

Well... VGHCX has a minimum balance requirement of $25k.

The dividend yield is lower, at 1.75% versus VHT's 2.93%.

The expense ratio is a little bit higher, at 0.36% versus VHT's 0.25%.

On the upside, it does appear to reduce risk slightly, with a Sharpe ratio of -0.11 versus VHT's -0.21.

It's also a tiny bit less volatile, with a standard deviation of 17.18 versus VHT's 17.53.

Finally, VGHCX has an impressively low turnover rate of just 6% (versus VHT's 5.6%). Not bad at all for an actively-managed fund.

On top of that, the 5-year return is 3.73% versus VHT's 1.73%.

Hmm! If you don't mind the $25k minimum requirement, and assuming it can keep up its performance, I say that's a pretty good looking fund! Basically, I think VGHCX is preferable if you're looking for fund performance, whereas VHT is better as a dividend play. What you prefer is entirely up to you, but that's my impression of it.

One last thing I want to note: This is a classic mutual fund, so it's subject to the usual selling restrictions, whereas VHT is an ETF you can liquidate immediately. It might not be a big deal, but I don't know what your investing or trading strategy is here, so I thought I'd point that out.

Last year I was looking to buy into the health care sector. My research (while not exhaustive) led me to buy VGHCX.

investment advice