Biotech stocks are always the subject of great speculation. When things go right, they soar and generate big profits overnight … but once a few biotech stocks start to fade, all we hear about is the prospect of a bubble in the sector.
Well, judging by the top biotech ETF investments lately, bubble fears seem to be grossly overblown, even if there is admittedly plenty of volatility in the sector.
Take the SPDR S&P Biotech ETF (NYSEARCA:XBI) and the iShares Nasdaq Biotechnology ETF (NYSEARCA:IBB) — two top ETFs focusing on biotech stocks that ran up quickly to start the year, then ran into trouble a few months ago as the “B word” started to appear in headlines.
Well, while both biotech ETF investments have admittedly seen some ups and downs, XBI and IBB are both up more than 17% year-to-date — and ultimately are right back where they were in March when pundits stated talking about the risk of biotech stocks melting down in articles like this one and this one.
The bottom line is that, while many of these companies are speculative and don’t yet have much in the way of substantial profits, the market forces are too much to bet against.
There is the built-in growth thanks to the demographic push of Baby Boomers who need more care as they age, and the continued expansion of modern medicine into emerging markets. There is also built-in stability since patients will cut back on just about any other spending before they forgo drugs or therapies that extend their lives and reduce their pain.
You also have Big Pharma looking at the continued pressures of patent expiration sapping their revenues … and subsequently a burning desire to acquire smaller biotech stocks as a result.
That means the growth potential and buyout premiums of the industry’s biggest winners will be more than enough to offset the losers — and that makes investing in biotech stocks via an ETF a great move.
XBI is the Best Biotech ETF
I have spoken before about the power of the SPDR S&P Biotech ETF, as recently as February and in other pieces that are much older. And here’s yet another rundown of why this is my favorite way to play biotech stocks:
For starters, the XBI biotech ETF focuses only on smaller biotech players that are developing the next generation of treatments to help the world. It’s a bit riskier than some other healthcare funds this way, but also a lot more growthy.
Consider that, as of right now, its top holdings are Synageva Biopharma Corp. (NASDAQ:GEVA), Dyax Corp. (NASDAQ:DYAX) and Esperion Therapeutics Inc (NASDAQ:ESPR) … hardly household names, and all under $8 billion in market valuation.
Furthermore, the XBI is much better diversified within the sector than other healthcare fund because these three picks that are at the top of the list only account for about 5% of total assets. Contrast that with a top competing biotech ETF, the iShares Nasdaq Biotechnology ETF that has more than 16% of its assets in its top two positions right now — Gilead Sciences, Inc. (NASDAQ:GILD) and Amgen, Inc. (NASDAQ:AMGN).
And by the way, GILD and AMGN both are worth more than $120 billion … so they are hardly the high-growth, development-phase startups you may think of when exploring biotech stocks.
To top it off, the SPDR Biotech fund is also cheaper than many competing biotech ETF investments out there at just 0.35% or $35 annually on $10,000 invested.
Sure, XBI is weighted towards smaller and riskier biotechs, some of which are development-stage drugmakers with no real revenue yet as they forge ahead with research and trials. That makes the XBI a bit more aggressive than other funds.
But given the outperformance of healthcare and the demographic push, this biotech ETF has a place in every portfolio — even if it’s only a small one.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. Write him at [email protected] or follow him on Twitter via@JeffReevesIP. As of this writing, he did not hold a position in any of the aforementioned securities.