Most of the innovation that comes out of Wall Street is more about fee harvesting than anything else, but the exchange-traded fund (ETF) phenomenon is one case where creativity has actually benefited investors.

ETFs allow us broad exposure to emerging trends in everything from individual sectors to entire economies with a single trade. Some even allow investors to decide when and how they’ll pay the taxes on those transactions.

Recent developments in the US heath care debate present an excellent example of how you can use these funds to profit from broad trends.

On Tuesday President Obama signed health care overhaul legislation into law and, so far, cats aren’t sleeping with dogs, and the Potomac River hasn’t overflowed its banks to swallow up Washington, DC. In fact, health care has been one of the top performing sectors of the S&P 500 so far this week.

The thing the markets hate most is uncertainty, particularly when it originates in Washington. Over the past two years the health care industry has been coping with the prospect of a single-payer system, increased government oversight, and the possibility of having to directly negotiate with gargantuan government programs over the cost of drugs and medical care.

All of these possibilities added up to a potential doomsday scenario for the health care industry, none of which came to pass. In fact, a strong argument can be made that in many respects the legislation will actually benefit health care outfits.

Somewhat ironically, in the short term the legislation will likely amount to higher costs for health care consumers. Most of what the industry views as the particularly onerous provisions of the bill–such as a total ban on denying coverage based on preexisting conditions and higher taxes on the industry to pay for the expanded coverage–don’t come into effect until 2014. In the meantime the health care industry is likely to do everything possible to maximize profits, including raising prices.

Over the long haul, too, the industry should actually benefit from the new law. An individual mandate requiring every American–including young, healthy ones–to carry health insurance kicks in in 2014. Most industry experts believe a broader insurance customer base will likely offset the profit drain created by requirements to care for the sickest individuals.

As my colleague Elliott Gue pointed out last week’s PF Weekly, the legislation will also amount to a higher tax burden on you and me as the government attempts to cope with its skyrocketing obligations.

Regardless of how we may feel about the legislation, the fact that health care reform is essentially a done deal means that the sector has the opportunity to once again be very profitable for investors.

Health care has traditionally been treated as a safe haven in tough economic environments because patients have little choice whether to delay consumption. But worries about the extent of reform in the offing blunted the effectiveness of health care as an investment refuge. During the recession of the early 1990s the S&P Health Care Sector Index outperformed the broader S&P 500 by almost 30 percent. The case was much the same during the short recession earlier this decade, as heath care outperformed by a little over 20 percent.

The safe haven effect has generated more muted returns this time around though–outperformance was limited to just over 10 percent, as investors priced in the worst-case scenario. Share prices of several smaller insurance outfits hovered near liquidation value, and the rest of the health care sector felt the crushing weight of the potential of a complete overhaul of the US health care system.

Now that a total revamping is out of the question, we can expect a steady improvement in share prices across most of the industry. ETFs are excellent vehicles to harness these potential gains.

iShares Dow Jones US Health Care (NYSE: IYH) is among the funds best-positioned to profit from the improved US health care outlook as well as the long-term growth of the industry.

It’s one of the larger funds in the space with more than $700 million in assets, almost two-thirds of which are allocated to pharmaceuticals and biotechnology. These two groups stand to gain the most from a deepening base of insured patients. It also has one of the smallest allocations to insurers and health care equipment manufacturers, which account for the remaining third of the portfolio. Finally, expenses are a low 0.48 percent annually, making it one of the cheapest available broad-based health care funds.

A more targeted play on the pharmaceutical industry which also carries a large income component is Pharmaceutical HOLDRs (NYSE: PPH). Constructed based on an interesting Merrill Lynch proprietary structure, Pharmaceutical HOLDRs allows shareholders to retain all voting rights on the 16 underlying securities as well as to collect all dividend payments they make.

The ETF is made up of some of the largest pharmaceutical companies in the world, almost all of which make regular dividend payments. Pharmaceutical HOLDRs currently yields more than 9 percent.

Pharmaceutical HOLDRs must be purchased in lots of 100 shares, a function of the fact that any investor can redeem their shares of the ETF for the basket of underlying securities; round lots make that process easier by eliminating the transfer of fractional shares. The HOLDRs structure is really the only one that allows investors complete control over when and how they deal with their tax bill.

If you opt to buy and sell the whole shares, the only taxes you’ll be liable for are your own capital gains. Pharmaceutical HOLDRs completely avoids embedded capital gains because the underlying shares never change. And the redemption of HOLDRs for the underlying securities isn’t a taxable event, so you can redeem the shares and sell based on what creates the most advantageous tax situation for you.

iShares Dow Jones US Pharmaceuticals (NYSE: IHE), also a targeted pharmaceutical play, is a little less complex than Pharmaceutical HOLDRs.

Go West

A panel discussion on the state of the economy…presentations by each of our expert editors…one-on-one time with those experts…a sunset cruise of San Diego Bay…

April 23-24 could be your most important weekend of the year. Roger Conrad, GS Early, Elliott Gue, Yiannis Mostrous and I will reveal the brightest trends and our best recommendations–and anything else you might want to know–during the 2010 Wealth Society Member Summit at the historic Hotel del Coronado.

They say it’s 72 and sunny every day of the year in San Diego, and in late April it probably will be. Tranquility and relaxation is good; that and the best independent view of global investing make a great combination. You may find all details at www.InvestingSummit.com.