Companies That Could Profit From Baby Boomers

JPMorgan has created an “Aging Population Index” of stocks expected to profit from the boomers.

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Forget the jokes about Viagra and adult diapers. And for the moment, put aside your skepticism about investing in the stock market at all. Just consider that there might be a way to profit from aging baby boomers.

More than three million Baby Boomers are turning 65 in 2011. The number of Americans reaching the ranks of the retired will increase for at least the next decade. By the time the proverbial pig has moved through the python, some 78 million Baby Boomers will have cashed billions of Social Security checks, swallowed trillions of Advil, and survived myriad hip replacements and heart transplants. Along the way they will be managing their finances through asset managers and mutual funds. And before it’s over, they will have bought long-term care insurance, done time in a senior citizen facility, and dropped an average of $8,000 per funeral.

[See 50 Best Funds for the Everyday Investor.]

JPMorgan has taken the trend seriously enough to create an “Aging Population Index” of stocks expected to profit from Baby Boomers. The list includes companies such as Humana (symbol: HUM) and Coventry Health Care (CVH), which provide health-care plans. It also includes Carnival (CCL) and Royal Caribbean Cruises (RCL), and Scotts Miracle Grow (SMG), because aging Baby Boomers are perceived to be interested in gardening.

These stocks may or may not be good investments. Unless you read their balance sheets and income statements, and know something of their future plans, how would you know?

The smart way to play the Baby Boomers is to identify a trend, then let an experienced expert pick the specific companies that will likely benefit from the trend. Here are three ideas:

[See top-rated funds by category, ranked by U.S. News Mutual Fund Score.]

1. Health care. It doesn’t take a genius to figure out that older people use more medical products than younger people do. The average 70-year-old gulps about three times more prescription drugs than the typical 40-year-old. Vanguard has a mutual fund called Vanguard Health Care fund (VGHCX) that will provide honest, intelligent and low-cost exposure to the industry. It rates four stars in the Morningstar rating system. Its biggest holding is Merck. Other four-star funds include the Schwab Health Care fund (SWHFX), with Johnson & Johnson as its largest investment, and the Live Oak Health Sciences fund (LOGSX), with the biotechnology company Biogen as its top holding. There are also a number of health care ETFs, including Vanguard Health Care (VHT).

2. Insurance and finance. Retirees are increasingly responsible for their own savings, income, and financial future. Money managers are developing more and more products to meet this need–from annuities to reverse mortgages to asset management. But again, are you in a position to figure out whether Aflac or American Express is a better investment? Vanguard has an ETF called Vanguard Financials (VFH), that invests in over 400 financial stocks. Schwab has a three-star financial mutual fund (SWFFX), and FBR Large Cap Financial (FBRFX) rates as a four-star fund.

[See 8 Funds to Watch in 2011.]

3. Consumer staples. Now we’re looking at adult diapers and Oil of Olay, and all the other personal care products targeted to older people. Vanguard offers an ETF called Vanguard Consumer Staples (VDC). Fidelity has a four-star consumer staples fund, Fidelity Select Consumers Staples Portfolio (FDFAX). The Rydex Consumer Products Fund (RYCIX) is also rated four stars. These funds invest in companies like Procter & Gamble, which cooks up the fiber supplement Metamucil, and Kimberly Clark, which deals out Depends.

Of course, there’s no guarantee that investing in any of these funds will produce better results than putting your retirement savings in a simple low-cost index fund–or even hiding your money under your mattress. But ... can 78 million Baby Boomers go that far wrong?

Tom Sightings is a former publishing executive who was eased into early retirement in his mid-50s. He lives in the New York area and blogs at Sightings at 60, where he covers health, finance, retirement, and other concerns of baby boomers who realize that somehow they have grown up.