Choosing the best biotech ETF for you

Filed under: Biotech ETF

You may have been told that a worthwhile investment opportunity to consider is an investment in biotech ETF’s. It is worth your while to learn a little about these investments and then to decide if the investment is for you and, if so, how to pick the right investment. In the first place, an ETF is an Exchange Traded Fund that is bought and sold on the stock exchange just like a stock. The difference is that in trading stocks, you will end up owning stock in only one or a few companies whereas with an ETF, you will end up owning a basket of stocks that span a particular industry or sector. For instance in a Biotech ETF, you will end up with a fractional ownership of a basket of different biotech stocks. As a result, you will be less exposed to the fluctuation of a single stock and you will gain if there is appreciation in this sector as a whole.

You will then need to understand how the biotechnology industry operates. Bio tech companies use biotechnology techniques such as gene manipulation to create products for the pharmaceutical industry, the medical diagnostics industry and the foods and agricultural businesses. It is characterized by large investments in advanced research and development as well as the latest and often unproven technology. Obviously the potential for a successful product is huge but the combination of unproven technology and the necessity for regulatory approvals at many stages of the product development process makes for a highly unpredictable business environment. The idea of investing in a Biotech ETF is a good idea so that you can share some of the large gains to be had in this sector while minimizing the effect of large losses.

You should keep in mind that the following factors are important in judging the fortunes of a biotech company:

• The pipeline for new products. Because of the complex process of bringing a new drug to market and the necessity for testing and regulatory approval at stages of the development process, many of the new products in the pipeline fail. Many biotechnology companies simply run out of financial and other resources in order to keep the development process going. As a result, profitable investment in the industry depends on the development of a few blockbuster products but the returns that one successful product can produce will far outweigh any losses.
• The possibility of acquisition. Many large companies are on the lookout for acquiring smaller biotech companies that could boost their own product pipelines. For instance, the pharmaceutical industry is known to have major problems with developing new drugs themselves and is constantly on the lookout for promising acquisitions. Generally speaking, when a large company seeks to acquire a much smaller company, the share price of the target goes through the roof.

Because each biotech ETF is different in composition and the returns are therefore variable, you should analyze each potential investment in detail to decide whether the composition of the basket of stocks is to your liking. For instance, if you want the broadest possible exposure to the industry with the least possible risk, you could consider a Biotech ETF such as Ishares NASDAQ Biotechnology. This ETF holds in the region of 170 different stocks with several investments in smaller companies that could boost the overall return. If you like high risk exposure, you could consider a leveraged biotech ETF such as ProShares Ultra Nasdaq Biotechnology (BIB) where the investment objective is to double the return provided by the NASDAQ Biotechnology Index.

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