A rationale for biotech ETF’s

Filed under: Biotech ETF

As is well known, biotechnology is a highly volatile industry and, whether you are investing directly in stocks or less so, in Biotech ETF’s, you have to take this volatility and the consequent high risk into account. The price of a stock can go quickly in either direction depending on such things as the success of its research or the lack of success as the case may be. Unlike any other industry, the fortunes of a company can swing wildly and you can therefore theoretically become rich overnight or see your investment wiped out.

This is a difficult market to analyze unless you have the requisite technical knowledge and background and yet, because of the promise of higher returns from even one successful investment, it is not a sector that can be ignored. A Biotech ETF is probably the sensible way to stay invested in the industry. Some ETF’s have only a few investments while others have a much larger portfolio of biotech stocks. The ETF that you will choose depends on your personal preferences and evaluation.

Despite all its drawbacks, Biotech will continue to be a major growth industry. It is also a recession proof because people will continue to fall ill and get injured regardless of the economic conditions. There are still a large number of diseases for which the most effective and least expensive treatment is lacking and research and development will continue in the direction of finding new remedies for these diseases. As global population and their life expectancy increases, so will the demand for affordable and effective drugs.

What is encouraging is that biotech companies themselves are trying to stop being over reliant on one single research project that could wipe them out in the event of failure. Instead they are starting to diversify by creating their own investment portfolios and by expanding their range of projects. They are trying to alter the investing perception that they are one-off lotteries by limiting their exposure to risk. While some analysts have concluded that many bad companies will fall by the wayside because they have no more cash, this actually improves the viability of the overall industry by clearing the playing field and increases the chances of success for the survivors.

States often compete with each other to attract biotechnology investment because of the job opportunities that are created. An increasingly lenient stance on the part of the government towards future technologies such as stem cell research can open the doors to the development of new blockbuster products. In addition, it looks increasingly likely that chemically formulated drugs will slowly be replaced by drugs based on genes which make promising biotech companies all the more attractive especially for pharmaceutical companies looking to acquisitions to boost their new drugs pipeline.

Finally, a Biotech ETF investment can be a smart defensive strategy because it limits the risk while retaining some of the upside. It is also smart investing because while biotechnology is technically a part of the healthcare sector, there is a very low degree of correlation between the two.

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