Make Money in Biotech the Simple Way

Exchange-traded funds offer a convenient way into the diverse and enticing biotech industry. But even when they cover the same industry, ETFs can differ wildly. Let's take a closer look at two biotech ETFs, and see which looks like a better bet for investors now.

Short and strong
The First Trust NYSE Arca Biotech (FBT) has a lot of promise, with a short but strong track record. It fell less than half as much as the S&P 500 did in the market-meltdown year of 2008, while handily beating the market both in 2009 and so far this year. At 0.60%, the expense ratio is a bit high for ETFs, but not completely unreasonable. With a concentrated portfolio of around 20 stocks, three-quarters of which are mid- or small-caps, the ETF has lots of room to grow quickly.

Still, there are some drawbacks to this ETF. For starters, it's tiny, with just $167 million or so in assets, making it extra-vulnerable in rocky times. Moreover, its concentration, while heightening potential gains, also increases risk.

Just take a look at three of the stocks it owns: InterMune (Nasdaq: ITMN  ) , Genzyme (Nasdaq: GENZ  ) , and Dendreon (Nasdaq: DNDN  ) . Genzyme is the subject of a hostile bid by Sanofi-Aventis (NYSE: SNY  ) , which has boosted the share price. If the deal falls through, the shares may return to previous lower levels. InterMune fell nearly 80% in May after the FDA rejected its lung-disease drug, and the stock still fetches just a third of what it did before the decision. And despite excitement about Dendreon's prostate-cancer drug Provenge, it's very pricey, with potential competitors on the horizon.

Bigger and… better?
Given those cautions, the iShares Nasdaq Biotechnology ETF (Nasdaq: IBB  ) gives investors a broader selection of more than 125 stocks. But again, this scope can be somewhat deceiving. Amgen (Nasdaq: AMGN  ) makes up close to 9% of the fund, although it's arguably one of the least volatile stocks in the entire sector. On the other hand, this fund also owns small companies such as Incyte (Nasdaq: INCY  ) , whose lead cancer drug is currently in Phase III trials for myelofibrosis and has posted promising results in early trials.

In addition, the iShares ETF is bigger, with $1.5 billion in assets, and less expensive with an annual expense ratio of 0.48%. It has turned in hit-or-miss returns in recent years, but overall, it's beaten the market handily over the past three and five years.

Why biotech?
ETFs take away much of the stress of picking successful stocks. Biotechnology is a critical field with lots of profit potential, but with roughly 200 publicly traded biotech companies, it's hard to figure out which ones will likely fare best over time.

Both ETFs look good to me. But if I had to pick, the iShares one seems a bit less risky, and a better value.

While you choose which stocks are right for you, get rid of the wrong ones. Dan Caplinger tells you which stocks to keep out of your IRA.

True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community.

Longtime Fool contributor Selena Maranjian owns shares of Amgen and GenzymeTry any of our investing newsletter services free for 30 days. The Motley Fool is Fools writing for Fools.


Read/Post Comments (0) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1345762, ~/Articles/ArticleHandler.aspx, 9/16/2014 5:52:36 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Apple's next smart device (warning, it may shock you

Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early-in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!


Advertisement