The Best ETF for 2012: SPDR S&P Biotech

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This article is part of our Best ETFs for 2012 series, in which we're seeking out the top-performing ETFs for the coming year.

The New Year looms, and many of us are wondering where we might most effectively park our investment dollars. One very promising field is biotechnology, which is likely to prosper over time as our population grows, ages, and develops medical conditions requiring treatment.

Below, I'll reveal my pick for the top ETF for 2012, which capitalizes on this opportunity. But first, I want to talk about some of the companies with enormous potential in the industry.

Consider the following companies, for example:

Spectrum Pharmaceuticals (Nasdaq: SPPI  ) : You might want to own Spectrum because of the strong reception its Fusilev drug is receiving as a way to combat side effects of chemotherapy. In addition, its non-Hodgkin's lymphoma treatment, Zevalin, has just become more convenient to use, which may attract more prescriptions.

Momenta Pharmaceuticals (Nasdaq: MNTA  ) : You might want to own Momenta because of its lucrative production of a generic version of blood thinner Lovenox -- and its plans to offer a version of Teva Pharmaceutical's (Nasdaq: TEVA  ) Copaxone.

Risky business
But hold on -- as promising as those companies may be, they're not without some serious risks. Momenta faces the risk of additional generic-drug makers eventually offering versions of Lovenox. Generic-drug makers have had some trouble recently manufacturing leucovorin, which competes with Spectrum's Fusilev, and the resulting shortages have benefited Spectrum. But if or when they manage to boost production, Spectrum's revenues may take a hit.

Troubles in biotechland are not remote possibilities. Look at Dendreon (Nasdaq: DNDN  ) . It developed an approved treatment for prostate cancer, Provenge, and investors were excited. But sales have been very disappointing, partly due to its hefty price tag. Shares fell more than 75% this past year! That's enough for some to deem it cheap and a great value, but others remain wary.

Or consider Ariad Pharmaceuticals (Nasdaq: ARIA  ) . Investors had been hopeful about the company and ponatinib, its in-development drug to treat leukemia. But phase 2 study results showed some serious side effects, and the stock plunged by around 13% on the news. Amylin Pharmaceuticals (Nasdaq: AMLN  ) recently fell by nearly 20% on news that it would end its partnership with Eli Lilly, thus leaving it with higher costs to bear for its diabetes drugs.

Buy them all
Clearly, you can get stung by biotechs. But while some such companies do take hits, others can prosper wildly on successful blockbuster drugs. Since it's hard for us to know which companies will do best, it makes sense to consider investing in a big bunch of biotechs at once. (That's true for many sectors, but especially biotechnology, since it's a field that most of us non-scientists don't understand very well.)

The SPDR S&P Biotech ETF (NYSE: XBI  ) fits the bill, plunking you into more than 40 companies. Its annual expense ratio is a reasonable 0.35%, which is far better than the typical stock mutual fund, which averages 1% or more. Over the past five years, the ETF has averaged annual gains of nearly 5%, handily beating the S&P 500. If you agree with me that biotech's a promising long-term play, the ETF has huge potential.

If you want to participate in medical breakthroughs without being much of a medical expert, consider adding this ETF to your portfolio. I'm bullish enough on it to make a CAPScall on it, giving it a green thumb on my CAPS page.

Stay tuned throughout our series on the Best ETFs for 2012 to find out about all of the picks our Foolish contributors have made. Click back to the series intro for links to the entire series.

Learn about the best dividend ETFs. And if you're looking for some great investments beyond ETFs, consider these 10 Stocks for Your Retirement Portfolio.

Longtime Fool contributor Selena Maranjian owns shares of Teva Pharmaceutical, but she holds no other position in any company mentioned. Click here to see her holdings and a short bio. The Motley Fool owns shares of Dendreon, Momenta Pharmaceuticals, and Teva Pharmaceutical. Motley Fool newsletter services have recommended buying shares of Momenta Pharmaceuticals and Teva Pharmaceutical. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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