The best biotech stocks are always difficult to identify. After all, development-stage drug companies are frequently unprofitable and will either explode higher when a big-name treatment gets approved by the FDA … or go to zero when that drug performs poorly.
But biotech stocks don’t have to be a crap shoot. Investors looking for the best biotech investments right now can get a piece of all the highfliers with a diversified investment in the SPDR S&P Biotech (ETF) (NYSEARCA:XBI).
There are a lot of other healthcare funds in the marketplace, but XBI is by far the most superior investment you can make right now. That’s because it holds a piece of the best biotech stocks out there, and is formulated in a way that offers true diversification and a true focus on the smallest companies with the biggest upside potential.
Why XBI Is Your Best Biotech Stocks Investment
For starters, everyone should have a sizable exposure to healthcare in general and biotech stocks in specific.
There is the built-in growth for healthcare companies at large thanks to the demographic push of baby boomers who need more care as they age in the U.S., and continued expansion of modern medicine into emerging markets. Also, there is built-in stability for recession-proof healthcare companies, 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.
As for why biotech is one of the best segments of healthcare, it’s all about growth.
Mature Big Pharma stocks are often lumbering giants struggling to offset expiring patents and simply throwing off dividends (for now) in place of any actual growth potential. Biotechnology companies, like small-cap tech stocks, have very high ceilings, and many have very bright futures.
Given all that, it’s hard to argue there is a better place to put your money than XBI right now.
For starters, the XBI is much better diversified than other similar ETFs. Consider competing biotech fund iShares Nasdaq Biotechnology Index (ETF) (NASDAQ:IBB) that has almost 25% of its assets in its top three positions right now.That’s in contrast to the XBI, which has an equal-weight methodology that, as a result, means no stock has no more than a 2.1% weighting right now.
Equally compelling is that the XBI fund errs on smaller companies instead of mature biotechs that have their biggest growth behind them. Consider the top three holdings of XBI as of this writing — Novavax, Inc. (NASDAQ:NVAX), Intercept Pharmaceuticals Inc (NASDAQ:ICPT) and Seattle Genetics, Inc.(NASDAQ:SGEN) — combine for a market capitalization of less than $9 billion.
Meanwhile, IBB’s top position, Gilead Sciences, Inc. (NASDAQ:GILD), is worth a whopping $120 billion and its No. 2, Amgen, Inc. (NASDAQ:AMGN), is worth $110 billion. If you want small biotechs instead of the big players, XBI is your best choice.
To top it off, the SPDR Biotech ETF is also cheaper than the competing iShares biotech fund at just 0.35%, or $35 annually on $10,000 invested; IBB is 0.48%, or $48 annually on $10,000.
If you want exposure to the growth in healthcare, this fund is perfect — even if it is a bit more aggressive than some others. The diversification of the XBI fund allows you to catch enough winners to offset any holdings that many crash, and the long-term performance speaks for itself.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP. As of this writing, he did not hold a position in any of the aforementioned securities.
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