Exchange-traded funds (ETFs) have become popular in recent years, partly because they carry some compelling advantages for investors over stocks and funds. They also permit investors to quickly and easily invest in various market sectors.

For instance, consider biotech. For new investors, ETFs present an attractive proposition: Why bother trying to choose the two or three most promising biotechnology companies out there when you can just invest in a biotech ETF? It will instantly invest you in a bunch of biotech companies.

There are differences and dangers among them, though. Alan Brochstein recently outlined some at seekingalpha.com, discussing three different biotech ETFs.

ETF

2007 Return

Number of Stocks

Expense Ratio

Biotech HOLDR

(11.95%)

15

0.05%*

iShares Nasdaq Biotech Index Fund

4.52%

170

0.48%

SPDR S&P Biotech

29.02%

31

0.35%

Source: Morningstar, Seekingalpha.com. *Based on quarterly custody fee of $2 per 100 shares.

The Biotech HOLDR is heavily concentrated, with Genentech (NYSE: DNA), Amgen (Nasdaq: AMGN), and Gilead Sciences (Nasdaq: GILD) making up nearly three-quarters of the portfolio. Even though the SPDR ETF doesn't have that many more stocks, it's much more diversified, with top holdings like OSI Pharmaceuticals (Nasdaq: OSIP) and Millennium Pharmaceuticals (Nasdaq: MLNM) each representing less than 5% of the fund's value. Meanwhile, the iShares fund includes scores of other companies, including Teva Pharmaceuticals (Nasdaq: TEVA) and Invitrogen (Nasdaq: IVGN). Also, the Biotech HOLDR is never rebalanced, while the others are rebalanced every three or six months.

Returns among the funds show huge differences. In 2007, the iShares ETF had returns close to the market averages, while the HOLDR lost more than 10% and the SPDR has gained nearly 30%. See? Very different.

The fees vary, too. HOLDRs only charge a custody fee of $2 per quarter. The SPDR fund's expense ratio is a modest 0.35%, while the iShares fund's ratio is higher, at 0.48%.

Be careful with biotech companies. The Biotech HOLDR prospectus perhaps says it best: "Many products and technologies that appear promising may fail to reach the market for many reasons. ... The biotechnology industry is highly competitive and is subject to rapid and significant technological change." Unless you have a great grasp of science, you may want to steer clear.

Millennium Pharmaceuticals is a Motley Fool Rule Breakers recommendation. Let our experts help you navigate the complicated biotech industry. Check out our Motley Fool Rule Breakers newsletter, which regularly reviews and recommends biotech offerings.

Longtime Fool contributor Selena Maranjian does not own shares of any companies mentioned in this article. Try any of our investing services free for 30 days. The Motley Fool is Fools writing for Fools.