Exchange-traded funds offer a convenient way to invest in sectors or niches that interest you. If you'd like to add some biotech companies to your portfolio but don't have the time or expertise to hand-pick a few, the iShares Nasdaq Biotechnology ETF (NASDAQ:IBB) could save you a lot of trouble. Instead of trying to figure out which stocks will perform best, you can use this exchange-traded fund to invest in lots of biotech companies simultaneously.
Why this ETF and why biotech?
The case for the biotech industry is clear: The world's population is growing and aging, and many diseases need effective, or more effective, treatments. That's easier said than done, though, and while plenty of biotech companies have seen their stock multiply in value many times over due to wildly successful drugs, many spend a lot of time and money on new drugs that don't earn approval. Thus, unless you're savvy about the industry, you'd do well to consider buying a basket of biotech companies -- from an ETF such as this leading one.
ETFs often sport lower expense ratios than their mutual fund cousins. This one charges just 0.48% per year, and it has outperformed the world market over the past three, five, and 10 years.
A closer look at some components
On your own you might not have selected Illumina (NASDAQ:ILMN) or Incyte Corporation (NASDAQ:INCY) as biotech companies for your portfolio, but this ETF includes them among its 120-some holdings.
Illumina has been very good to long-term investors, with its stock averaging 50% growth annually over the past decade. It's an early leader in gene sequencing, a market estimated by some to eventually total $20 billion. It's not exactly a biotech, though, instead specializing in diagnostics, including genetic and biological analysis. It has a range of sequencers on the market, and briskly growing revenue and earnings. This year it launched its inexpensive HiSeq X Ten sequencer, which is selling well. Note that inexpensive means that it can sequence a whole human genome for about $1,000. The price tag on the HiSeq X Ten itself is about $10 million for a set of 10 machines.
The company's latest quarterly results featured estimate-trouncing revenue and earnings, boosted by "unprecedented demand" for the HiSeq X Ten, which surpassed management's "most aggressive assumptions." Illumina does have some competition, but it's very much the dominant player (70% market share!) in its field.
Given the strong demand for the company's many products, Illumina is a compelling portfolio candidate, except for one thing: its stock price. With a recent P/E of 128 and a price-to-sales ratio topping 17, it's no screaming bargain, but it's hard to bet against the company, too. Consider adding Illumina to your watch list -- or, if you're not risk-averse, perhaps buy in increments and aim to be rewarded over the long run.
Incyte is another company that seems wildly overpriced, with no current P/E ratio (due to there being no earnings yet), a forward P/E of 106, a price-to-sales ratio topping 23, and a market capitalization above $9 billion. The stock has more than doubled over the past year and has averaged 16% growth over the past 20 years.
What are investors so excited about with Incyte? Well, it sports a portfolio of Janus kinase inhibitors, or JAK inhibitors, which can tackle cancer and inflammatory diseases at lower costs. Only one, Jakafi, is approved, though, to treat myelofibrosis. Incyte is looking to have it treat a broader range of conditions, but some might have had their confidence in Incyte's ability to do that shaken when it recently presented an abstract on Jakafi's efficacy against pancreatic cancer that left many unimpressed.
Incyte has plenty of potential, but much of it remains theoretical at this point, until its pipeline generates more approved products. The shares seem overpriced for a one-drug company, but if Incyte's baricitinib -- which treats rheumatoid arthritis and is in phase 3 trials -- wins approval, the stock might deserve a fresh examination. Rheumatoid arthritis, after all, is a widespread disease, affecting 1.5 million people. That's a big market.
The big picture
It makes sense to consider adding some biotech companies to your portfolio. You can do so easily via an ETF. Alternatively, you might simply investigate its holdings and then cherry-pick from among them after doing some research on your own.
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Longtime Fool specialist Selena Maranjian, whom you can follow on Twitter, has no position in any stocks mentioned. The Motley Fool recommends Illumina. 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.