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Buying This Beaten-Down ETF Could Make You a Fortune Over the Next 10 Years

By Keith Speights - May 7, 2021 at 5:52AM

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It definitely made investors a lot of money over the last decade. And its future could be brighter than the past.

Warren Buffett recently stated, "I do not think the average person can pick stocks." You can argue with his view, but I suspect he's right for one simple reason: The average person isn't willing to spend the amount of time needed to adequately research stocks before they buy.

However, exchange-traded funds (ETFs) provide a way for investors to buy a large basket of stocks in one fell swoop. And you don't have to research all of the individual stocks in the ETF.

But which ETFs are the best picks? Buffett likes S&P 500 index ETFs, and I agree. My view, though, is that there's a sector-specific ETF that looks even more attractive right now. Buying this beaten-down ETF could make you a fortune over the next 10 years.

Image of a light bulb over a woman's hand and an image of a dollar sign formed by cash over a man's hand

Image source: Getty Images.

Beaten down (relatively speaking)

I won't try to build the suspense. The ETF that I believe could be a huge long-term winner is the SPDR S&P Biotech ETF (XBI 3.31%), which I'll refer to by its ticker (XBI) for short. As its name indicates, XBI holds positions in biotech stocks.

XBI has been a massive winner for investors. Over the last 10 years, it's achieved an average annual return after taxes on distributions and sale of fund shares of 17.5%. And over the last 12 months, the ETF has soared more than 30%.

However, XBI has been beaten down quite a bit, at least on a relative basis. It's now more than 25% off its highs set earlier this year.

XBI Chart

XBI data by YCharts.

Why has the biotech ETF given up so much of its gains? In February, large institutional investors started moving money out of biotech and technology stocks and into energy, financial, and materials stocks. As a result, XBI is back at the level where it traded in November 2020.

Why XBI should fly higher

I think this pullback presents a great opportunity to buy XBI. My view is that the ETF should fly much higher.

For one thing, XBI looks cheap right now. It trades at less than 11 times expected earnings. That's roughly half the forward earnings multiple for the S&P 500.

More importantly, we're living in a golden age of biotech. Just think about what has transpired over the past few months. Companies like Moderna (MRNA -0.37%) have developed safe and highly effective COVID-19 vaccines in an amazingly short time. Regeneron (REGN 0.77%) has won authorization for antibody therapies that help treat COVID-19.

More tremendous innovations could be on the way. Exact Sciences (EXAS 0.83%) is a pioneer in liquid biopsies that could enable early cancer detection through a simple blood test. Some of the most exciting biotechs today are editing genes to potentially cure diseases, including Beam Therapeutics (BEAM 4.52%) and Intellia Therapeutics (NTLA 3.26%).

XBI owns shares of each of these biotechs -- plus a lot more. It currently holds positions in 191 individual biotech stocks. All of the companies behind those stocks are hard at work developing new therapies, devices, or tests that hold the potential to improve how diseases are diagnosed and treated.

A good way to invest in biotech

To be sure, some of the biotechs in XBI's portfolio won't be successful. That's fine. The ETF's holdings are roughly equally weighted, with the biggest positions making up less than 1% of the total fund. A few losers won't cause XBI to crash.

That's the main advantage to investing in XBI. You don't have to worry about picking winners and losers. The annual expense ratio of 0.35% should be worth the price for most investors to avoid this headache and greater risk.

There's no such thing as a sure thing when it comes to investing. However, I think that the next 10 years for biotech stocks will be at least as good as the last 10 years because of the incredible progress in researching the underlying causes of various diseases. If I'm right, buying XBI now could deliver a five times or greater return over the next decade.

Keith Speights owns shares of SPDR S&P Biotech. The Motley Fool recommends Exact Sciences and Moderna Inc. The Motley Fool has a disclosure policy.

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Stocks Mentioned

SPDR Series Trust - SPDR S&P Biotech ETF Stock Quote
SPDR Series Trust - SPDR S&P Biotech ETF
$93.78 (3.31%) $3.00
Regeneron Pharmaceuticals, Inc. Stock Quote
Regeneron Pharmaceuticals, Inc.
$628.71 (0.77%) $4.81
Exact Sciences Corporation Stock Quote
Exact Sciences Corporation
$42.71 (0.83%) $0.35
Intellia Therapeutics Stock Quote
Intellia Therapeutics
$67.74 (3.26%) $2.14
Moderna, Inc. Stock Quote
Moderna, Inc.
$171.18 (-0.37%) $0.63
Beam Therapeutics Inc. Stock Quote
Beam Therapeutics Inc.
$69.08 (4.52%) $2.99

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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