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 - News) and iShares DJ Health (NYSEArca:IYH - News).

One of the least frequently mentioned is the iShares Dow Jones U.S. Medical Devices ETF (NYSEArca:IHI - News). 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 - News) 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 - News) and iShares Dow Jones U.S. Pharmaceuticals (NYSEArca:IHE - News) 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).

When it comes to biotech stocks, there’s no certain formula, since many of these Nasdaq-listed companies are still pre-revenue and/or subject to major swings in market capitalization on incremental news announcements. Still, staying simple might be the best way to go for now. The SPDR S&P Biotech ETF (NYSEArca:XBI - News) is well-diversified, with just 45 percent of its funds invested in its top 10 holdings; it’s also mostly invested in nontraditional pharma companies.

The same cannot be said for rivals such as the iShares Nasdaq Biotechnology ETF (NasdaqGM:IBB - News). IBB’s top holding is Amgen, with an 11 percent focus.

XBI, on the other hand, counts cancer immunotherapy upstart Dendreon as its top investment, but with a less aggressive 4.4 percent concentration.

For biotech investors who are uncomfortable with the sector’s swings, a broader focus in more aggressive investments that are likely to benefit from Obama’s moves to liberalize controversial medical policies such as stem cell research is a more attractive proposition than a heavier one in traditional companies trying to make the leap into third-generation medicine. XBI is also an arguable bargain right now; it’s one of the few long-only ETFs that is down 9.6 percent year-to-date.

Clean Energy

Along with health care, clean energy is the biggest new policy initiative available from the White House administration. It’s already a well-known fact that many of the big corporate backers of Obama’s bid for the presidency were nuclear energy producers such as Exelon.

At the end of October, the president caused a stir in the solar energy sector when he paid a visit to the DeSoto Next Generation Solar Energy Center in Arcadia, Fla., as a show of support for the further development of the industry.

As is the norm with policy-based investing, however, investors in solar companies this year have been left with some unnerving volatility. Shareholders of market leader First Solar, for example, are stuck with a 10 percent loss year-to-date, while those who bought rival Canadian Solar for the same period have multiplied their investment by more than one and a half times. In the nuclear energy space, performance disparities are similar, with massive gains in some companies and disappointing under-performances in others. (You can read a recent story on the subject here in IndexUniverse.com’s sister publication, HardAssetsInvestor.com.)

These types of disparities create the perfect storm for ETF investing. A glance at the performances of three clean tech ETFs reveals why. Year-to-date, the Claymore/MAC Global Solar Energy Index Fund (NYSEArca:TAN - News) has dropped just 1.7 percent; the Market Vectors Solar Energy ETF (NYSEArca:KWT - News) has fallen around 9 percent; the Market Vectors Nuclear Energy ETF (NYSEArca:NLR - News) has gained 18 percent.

These performances are much more consistent with most investors’ ideal portfolio gain and loss parameters than those presented by investing in individual stocks in the same space.

Further, when it comes to solar energy, it is likely that ETF investing will remain the way to go. In a research note published on solar energy in August, New York-based Jefferies & Co. analyst Paul Clegg points out that while the sector will continue to grow as a whole, the effects on different companies will be wide-ranging.

“We expect rapid growth in solar volumes, but a downward pricing spiral and lack of discipline around capital deployment leave us cautious on cell and module manufacturers,” wrote Clegg. “We believe that low barriers to entry … and the industry’s reliance on a system of incentives encourages mini boom/bust cycles.”

For solar investors, TAN looks like a nice approach, since its gives exposure to domestic and foreign solar energy providers alike (nearly a fifth of its top 10 holdings are in ADRs), and is not too overly focused on First Solar. Likewise, NLR has some solid exposure to foreign producers too, as well as Obama-favorite Exelon.

While U.S. policy-based investing is traditionally fraught with volatility (think dot-com stocks), for an investor who uses ETFs sensibly to spread the risk, it need not be anything out of the ordinary.

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Correction:An earlier version of this article stated that IBB missed part of the biotech market because it did not hold Genentech (NYSE:DNA - News).  Genentech was acquired by Roche earlier this year, and therefore no longer trades as a stand-alone company.