Your Biotech ETF primer

Filed under: Biotech ETF

The universe of Biotech Etf’s consists of pools of Biotech stocks that indulge in a variety of different businesses. As the name suggests, biotech companies use a combination of biology and technology to come up with new products in fields such as the development of new vaccines, the creation of plant hybrids, and the creation of new genetic species and genes and indeed any process that can marry biology successfully to technology. Because of the nature of their business, biotech companies have a high mortality rate and should be considered high-risk investment.

If you are keen on investing in biotechnology companies, a Biotech ETF is a highly suitable vehicle for your investment. Many bio technology companies are years away from making a profit and a majority of them are likely to fall by the wayside very often simply because they run out of cash. Other companies are allowed to die by their backers who are tired of waiting for returns from investments. However, everyone knows that a successful bio technology company is a gold mine in waiting and you can see spectacular returns that are more than enough to wipe out your losses. Because it is extremely difficult to pick individual biotech companies to invest in on the basis of their prospects for success, an ETF enables you to spread your risk and avoid the perils of investing in single stocks.

It is important to you to go in for your Biotech ETF investment with a firm investment strategy and stop loss prices in place. You will also need to know which index is being tracked and how the investments of that particular ETF are allocated to the index stocks. An understanding of how and why your Biotech investments will gain or lose in value will enable you to exploit the swings and control your risk. In a sense, you can draw lessons for by technology investments from the publishing or the moviemaking business. Most books or movies will lose money and only a handful (about 2% in the case of the movie business) will make money but the money they make will make up for the losses. Typically, a pharmaceutical company might have 50 drugs in the development pipeline but only a few of them will actually be brought to market. The prolonged testing process may reveal that the new drug is dangerous or fail in other ways. However, even one blockbuster is enough to keep a pharmaceutical company going for some years.

Remember to shop around extensively in picking the Biotech Elf’s that you want. For instance, the difference between the price at which a market maker sells and a market maker buys is called the bid/ask spread and, as a rule, the smaller the spread, the cheaper the ETF will be to buy. The bid/ask spread on thinly traded Elf’s tend to be wide making them relatively expensive. Check out the companies that are represented in the ETF that you are buying and in particular watch for patents that are expiring and what pipeline products are available to replace these products going off patent.

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