Exciting new technology niches always will have their ups and downs, but if you get into the right company in the right niche at precisely the right time, the rewards can be breathtaking. For example, who wouldn’t want to travel back to Dec. 12, 1980 and buy Apple’s (NASDAQ:AAPL) IPO at $22? The stock is soaring near $600 today, and since it has split three times, the adjusted IPO price is somewhere in the neighborhood of $3.
Biotechnology is one of those high-octane sectors that, like personal computers back in 1980, potentially could trigger a paradigm shift in the way we live and work. Simply put, biotech involves using living organisms or their products to improve our health or environment. Major biotech applications include pharmaceutical, agricultural and industrial.
Although the biotech sector took a hit during the recession, it’s beginning to come back strong. An improving global economy, better access to R&D funding, favorable government initiatives and the expanding use of biotech in medical sciences and agriculture will drive the market to more than $320 billion by 2015, according to a report by Global Industry Analysts. Drugs and other health therapies promise blockbuster benefits to an aging population.
But as with all opportunities in new technology markets, the challenge lies in separating the winners from the losers and also-rans. Diversification takes some of the guesswork out of that process, and exchange-traded funds (ETFs) are a good way to gain exposure to the biotech sector without betting the farm on a single company. ETFs trade over a major exchange, just like equities, and expenses tend to be lower than those of actively traded mutual funds.
It’s important to note that biotech ETFs are a good fit for investors with an aggressive growth strategy and a high risk tolerance. Although companies that produce these leading-edge products can generate exciting returns, they can also lose a lot of money quickly, so consider your time horizon carefully.
That said, here are four biotech ETFs for a healthy portfolio:
iShares Nasdaq Biotechnology Index Fund (NYSEArca:IBB). This is the “grand old man” of biotech ETFs – it has been around since 2001. With a market cap of nearly $1.8 billion, it is also the largest biotech ETF. IBB tracks the Nasdaq Biotechnology Index and invests primarily in companies that engage in biomedical research and development of drugs or other treatments for medical conditions. Top holdings are focused on big players like Alexion (NASDAQ:ALXN), Amgen (NASDAQ: AMGN), Regeneron Pharmaceuticals (NASDAQ:REGN), Celgene (NASDAQ:CELG) – the market-cap weighting approach makes the fund potentially less volatile. IBB is trading around $122 and its expense ratio is on par with the rest of the sector at 0.48. IBB’s one-year return is 28.4% and its year-to-date return is nearly 17%.
ProShares Ultra Nasdaq Biotechnology (NYSE:BIB). This is a different play on the same index tracked by IBB. In this case, though, it’s a double-long, leveraged ETF that aims to deliver twice the performance of the Nasdaq Biotechnology Index. This should be considered a short-term investment that bets on capturing impressive returns from bullish performance in the biotech sector. (If you’re bearish on the sector, ProShares has BIS, an Ultra Short biotech ETF that inversely tracks the same index.)
But back to BIB, which is small, with a market cap of just $23 million. BIB is currently trading around $93.50 and has an expense ratio on the higher end of the scale at 0.95. But its one-year return is a whopping 52% and its year-to-date return is nearly 35%.
SPDR S&P Biotech ETF (NYSE:XBI). XBI approaches the biotech sector in a different way. It’s broadly diversified, with 30 biotech companies, large and small, in equal weightings. Larger players include Celgene, Alexion and Regeneron, with Momenta (NASDAQ:MNTA), Spectrum (NASDAQ:SPPI) and InterMune (NASDAQ:ITMN) as some of the fund’s smaller players. The inclusion of so many small companies makes the ETF more aggressive than IBB.
With a market cap of $518 million, XBI is trading around $78.50 and its expense ratio is a very attractive 0.35. XBI’s one-year return is over 26% and its year-to-date return is 18%.
PowerShares Dynamic Biotechnology & Genome Portfolio (NYSE:PBE). While this fund has holdings in the usual large-cap suspects such as Amgen, Alexion and Biogen (NASDAQ:BIIB), it also holds very dynamic small caps such as BioMarin (NASDAQ:BMRN) and Seattle Genetics (NASDAQ:SGEN), which have promising drugs in late-stage testing. It also has genome-focused companies such as Life Technologies (NASDAQ:LIFE).
While the risks are potentially higher than with an ETF like IBB, some of the small-cap components of this fund could be acquired by, or establish partnerships with, larger biotech companies. With a market cap of about $140 million, PBE is trading around $22.50 and its expense ratio is 0.63. It has a one-year return of over 8% and a year-to-date return of 12%.
As of this writing, Susan J. Aluise did not hold a position in any of the stocks named here.