Make Money in Biotech the Easy Way

Exchange-traded funds offer a convenient way to invest in sectors or niches that interest you. If you expect the biotech industry to thrive as it develops new treatments for all kinds of health problems, the SPDR S&P Biotech (NYSE: XBI  ) ETF could save you a lot of trouble. Instead of trying to figure out which companies will perform best, you can use this ETF to invest in several dozen of them simultaneously.

The basics
ETFs often sport lower expense ratios than their mutual fund cousins. The biotech ETF's expense ratio -- its annual fee -- is a relatively low 0.35%.

This ETF has performed well, beating the overall market handily over the past three and five years. As with most investments, of course, we can't expect outstanding performances in every quarter or year. Investors with conviction need to wait for their holdings to deliver.

What's in it?
Several of this ETF's components made strong contributions to its performance over the past year. ARIAD Pharmaceuticals (Nasdaq: ARIA  ) , up 179% over the past year, has a promising immunosuppressant for cancer, ridaforolimus, in phase three trials, and stands to benefit from the salesforce power of its partner Merck (NYSE: MRK  ) . Regeneron Pharmaceuticals (Nasdaq: REGN  ) , which partnered with Sanofi (NYSE: SNY  ) to sell Zaltrap, saw its shares rise 101% over the past year. It owes that rise partly to news that Zaltrap, in conjunction with chemotherapy, helps patients with colon cancer.  

Other companies didn't add to the ETF's returns last year but could have an effect in the years to come. Dendreon (Nasdaq: DNDN  ) , for example, down 2% over the past year, has FDA approval for its new (though pricey) prostate cancer drug Provenge, but it hasn't been able to produce enough to meet demand. Human Genome Sciences (Nasdaq: HGSI  ) , down 5%, has finally brought a drug to market (Benlysta, for lupus), though profits may be a few years away.

The big picture
Demand for biotechnology isn't going away anytime soon. A well-chosen ETF can grant you instant diversification across the industry -- and make investing in and profiting from the sector that much easier.