Why you should continue to invest in biotech ETF’s

Filed under: Biotech ETF

If you are an ETF investor, you are probably there at because of the instant diversification and the risk protection that you get even if you are a small investor. These benefits are most apparent in biotech ETF’s because the biotechnology industry is notorious for its volatility and high degree of risk. The chances of success of a drug being developed by one biotech company does not have any relationship whatsoever with the chances of success of a drunk been developed by another company and your biotech ETF should therefore be viewed as a portfolio of investments is the success of different and unrelated drugs. Many of these companies are still in the process of researching and developing new drugs and do not have a product on the market or any significant business revenues. A small handful of these companies will be successful in testing and obtaining approval for new medical treatment and the growth and the returns to you will explode dramatically. However, a large majority of these companies will fail either because they do not obtain the necessary regulatory approvals at every stage of the process simply because they have run out of cash.

Right now, there is a great deal of investor focus on the biotech industry because of potential mergers and acquisitions by large pharmaceutical companies. Large pharmaceutical companies are looking at wholesale losses of revenues because of the expiry of patent protection on their existing blockbuster drugs and need to replace them quickly. Rather than spend large amounts of money on developing new drugs from scratch, it is cheaper for the major pharma companies to buy biotech companies with promising products under development even if they have to pay a fancy premium for the acquisition.

From a biotech industry perspective, large Biotech companies saw some downward pressure on their stock prices as a result of health-care reform in the US and austerity measures in most of Europe. And a tax on the industry should reduce earnings slightly in 2011. However, many industry analysts expect a return to normal this year and next after a bad year in 2010. However, the biotech industry has outperformed other industries as well as the broader market. If you are an investor in biotech ETF’s, you should be extremely happy with your capital appreciation over the last five years because biotech ETF’s have significantly outperformed the S&P 500 index.

There is plenty of scope for continued growth in the biotech industry because there are still many diseases where patient needs for medication have not been fulfilled. Diseases for which the drugs are under development include hepatitis C, diabetes and cancer and any successful treatment that has developed is in all probability going to be a major blockbuster. In addition, the pressure on major pharmaceutical companies to find new pipeline drugs to replace the drugs coming off patent will continue at least up to the year 2015 and they will be unable to find these drugs from their own research and development efforts. All this is good news and you should continue to regard biotech ETF investment favorably.

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