With every new White House administration comes a whole new set of policy initiatives. On Wall Street, it is well known that buying and selling stocks in the sectors affected by those new policies can reap handsome returns. The problem is that such stocks also present substantial outsize risks and periods of under-performance, leading to big volatility in an investor’s portfolio and occasional damaging losses.

With the widespread use of ETFs, investors looking to ride the coattails of the policy initiatives of the current administration stand a better chance of maximizing their gains while reducing the day-to-day volatility inherent in a single-stock approach.

In the past few weeks, the S&P 500 Index has seemed to level out after its strong recovery from the March 9 lows. Despite President Obama’s continued policy drive in health care and energy reform, many of the ETFs focused on these sectors have actually sold off over the past few weeks.

The Opportunity In Health Care

When it comes to U.S. policy-based investing, nowhere is more hair-raising right now than the health care industry. Obama’s plan to implement part-nationalized health care in the country has sent related stocks on something of an uncertain course during 2009. For example, Merck and Pfizer have done much worse than the S&P 500 this year, spotted by periods of irregular buying such as at the end of July.

Some of that selling may be overdone now, and there appear to be sectors that are currently being overlooked, according to market participants.

Jim Oberweis, chief executive of Oberweis Asset Management in Illinois, points out that biotech stocks are in a more positive position than investors thought previously, while companies such as health care provider IPC could benefit from increased patient visits.

“Certainly if you have an increase in coverage, then we’ll see a much better collection of patient visits,” Oberweis said in an interview with IndexUniverse.com.

Oberweis added that while the details of Obama’s plans to shake up U.S. health care are still unclear, “there is a possible positive [outcome] for pharmaceutical companies” in the plan. The argument here goes that as the net of Americans who receive health care coverage is widened, firms such as Teva Pharmaceuticals and Johnson & Johnson will see an increase over time in sales of prescription drugs.

There are several ETFs that can enable investors to take advantage of growth in the number of patients receiving coverage. That includes seven broad-market health care ETFs, including the popular Select Sector SPDR – Health Care (NYSEArca: XLV) and iShares DJ Health (NYSEArca: IYH).

One of the least frequently mentioned is the iShares Dow Jones U.S. Medical Devices ETF (NYSEArca: IHI). IHI has posted gains of 26 percent year-to-date, and as a result, it got sold heavily in the recent market unwinding.

Given the fact that it invests in a niche area, IHI is pretty well-diversified, with 58 percent of its assets under management in its top 10 holdings, and a maximum single-stock weighting of 10 percent (Medtronic). Collectively, the firms IHI is invested in, such as Boston Scientific and Intuitive Surgical, manufacture a whole range of medical instruments, from standard operating-room scissors and needles to high-tech cardiovascular and diabetes monitors. These kinds of companies should all benefit from an uptick in the number of hospital patient visits.

In terms of pharmaceutical plays, PowerShares Dynamic Pharmaceuticals ETF (NYSEArca: PJP) presents a well-diversified bet on large, mostly dividend-paying pharmaceutical companies that have lots of cash and could also see an uptick in sales of their core prescription drugs. With just 45 percent of its funds invested in its top 10 holdings―which include household names such as Abbott Laboratories, Bristol-Myers Squibb and Johnson & Johnson―PJP has dramatically under-performed so far this year.

While more popular rivals SPDR S&P Pharmaceuticals (NYSEArca: XPH) and iShares Dow Jones U.S. Pharmaceuticals (NYSEArca: IHE) have both returned more than 15 percent year-to-date, PJP has remained relatively lightly traded, posting just 5 percent in gains in the same period. For many investors, PJP can offer a nice compromise between the two in such an uncertain space, since it is most heavily focused in all the oversold traditional pharma brands (like IHE), but not too tightly concentrated (like XPH).

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