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% |
The Biotech HOLDR is heavily concentrated, with Genentech
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.