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Being that I am more of an individual stock picker, I normally don't promote a lot of exchange-traded funds, or ETFs. But there are exceptions. Certain sectors that require exceptional knowledge and dedication beyond what any layperson posses have historically outperformed the broader market. Without expertise in these specific areas, the average investor doesn't stand a chance. That's when I'm willing to pay the small fees associated with an ETF for dedicated advisors who monitor their respective sectors.

Healthy returns
The biotechnology sector is a perfect example. Unless you are a specialist who has the time to dig through hundreds of different biotech companies and accurately gauge the potential of their devices, medicines, and sales, then you are bound to make costly mistakes.

This is where the iShares NASDAQ Biotechnology Index ETF (NASDAQ: IBB  ) comes into play.

Over the last three years, this ETF has outperformed the S&P 500 by an impressive 80%. Better yet, these returns should continue well into the future. Looking at the top three holdings in this ETF, we find Gilead Sciences  (NASDAQ: GILD  ) at 8.7% of the fund, Biogen Idec  (NASDAQ: BIIB  ) at 8.6%, and  Celgene  (NASDAQ: CELG  ) composing 8.1% of the total holdings.

The players
Gilead is a leader in innovative biotechnology. This month it released promising results in slowing the progression of lymphocytic leukemia. This comes on the heels of positive news in the battle against HIV where a three-year study showed a single tablet administered daily had "comparable efficacy" to "cocktail" approaches. Good news like this is becoming the norm.

Gilead currently has 15 products marketed and more than 200 clinical trials underway that are focused primarily on HIV, liver disease, cardiovascular ailments, respiratory conditions, and cancer.

Over the last year, Gilead's stock has nearly doubled, and with good reason. In the latest quarter, recently launched antiviral drugs such as Stribild and Complera/Eviplera contributed to a 15% year-over-year increase in revenue, as well as 15% increased sales. This led to an upward revision of product sales estimates for full-year 2013 guidance. The bullish sentiment continues well into 2014, with analysts expecting full-year earnings up 87% year over year.

Biogen is an oncology, neurology, and immunology specialty company that is developing groundbreaking treatments for diseases such as M.S. and hemophilia. Tecfidera (dimethyl fumarate) is currently the leading oral M.S. treatment in the U.S. after only six months on the market, and it helped boost the company's most recently quarterly revenue by 32% year over year. Guidance was raised as a result.

There are currently 15 possibilities in the Biogen pipeline, with seven currently in the phase 3 or filing phases. These drugs provide new hope for patients with MS, hemophilia, and lymphocytic leukemia, as well as other conditions.

Over the last year, Biogen's stock is up 78%, and at $240 per share, it may spook the average investor. The valuations and future prospects are still attractive, however. In fact, if analysts' estimates hold true, then EPS of $11.79 for the 2014 fiscal year should produce a share price of $472, given the current P/E of 40.1.

Celgene is a diverse biotech company that currently has more than 25 unique compounds addressing more than 30 disease areas.

Over the last year, the company's stock is up an impressive 107%. This ride is just beginning, too. The most recent quarter saw impressive sales increases from all but one of the company's existing drugs, with new drugs also contributing to the top and bottom lines. Multiple new filings are expected in the fourth quarter of 2013 and the first quarter of 2014, and the company's drug portfolio could expand significantly as a result. Look for the approval of Imnovid, used to treat multiple myeloma, to begin contributing in the fourth quarter of 2013 following its recent approval in Europe.

A Foolish ETF
A flurry of development means new drugs are constantly coming to market and are thus increasing profitability. It's nearly impossible to maintain a firm grasp on the fast-moving biotechnology sector, but fortunately there are a few people who devote their professional lives to doing just that so the rest of us can simply buy an ETF and move on. The iShares NASDAQ Biotechnology Index ETF should allow the average investor to reap above-average returns from this highly profitable sector for years to come, all without having to become a biotech specialist.

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Related Tickers

10/27/2016 3:15 PM
IBB $265.86 Up +0.55 +0.21%
iShares NASDAQ Bio… CAPS Rating: ****
BIIB $291.12 Down -5.34 -1.80%
Biogen CAPS Rating: *****
CELG $105.30 Up +6.89 +7.00%
Celgene CAPS Rating: *****
GILD $75.82 Up +0.44 +0.58%
Gilead Sciences CAPS Rating: *****