Individual biotech stocks have a perception of being risky investments. But the historical gains for the sector are extremely attractive. What’s the best biotech ETF to buy today?
For the risk averse investors, biotech stock funds are the answer. Using a mutual fund or ETF, you can capture big gains from the sector. Plus, you can limit your risk from any one company by owning a diversified group of biotech stocks.
In 2014, the NASDAQ Biotechnology Index (NBI) had a gain of 34.1%, which compares to 11.4% on the S&P 500 Index (SPX). Thus far in 2015, the NBI is up 4.8% and SPX is up 0.47%.
Factors that helped biotech stocks in 2014 include low interest rates, healthcare policies, demographics, and new product approvals and most or all of these factors look to continue in the foreseeable future.
The only apparent downside to biotech stock performance now may be cautiousness on the part of the investor herd due to a concern that the sector is overbought and the feeling that it may be due for a short-term correction.
Ride the Biotechnology Rally With this ETF
The best way to capture the performance of an equity sector is to buy an equity sector index fund or ETF. And the best biotech ETF is the SPDR S&P Biotech ETF (XBI).
The biotech sector rally began three years ago. Beginning with 3-year performance, the SPDR S&P Biotech ETF, through February 10, 2015, is outperforming 81% of all funds in the health sector category. In 2014 XBI gained 44.9%, compared to 34.1% on the NASDAQ Biotechnology Index. The 5-year performance rank for XBI places it ahead of 80% of the health sector.
Year-to-date, XBI is up 6.4%, while the NASDAQ Biotech Index is up 4.8%.
One caveat with XBI is that, while it will likely continue to outperform in up markets, it could be a significant under-performer in a down market. This ETF could be described as a high beta fund.
This is because XBI is an equal-weighted index fund, which means that the fund’s portfolio will have an equal portfolio weight (same allocation percentage) on the mid- and small-cap biotech stocks as it will the large-cap biotech stocks. This tends to give it bigger gains in up markets but bigger declines in down markets, as compared to a market-cap weighted index fund that has more exposure to the larger names than the smaller ones.
Top holdings of the SPDR S&P Biotech ETF (XBI) include Foundation Medicine (NYSE: FMI), Halozyme Therapeutics (NASDAQ: HALO) and Neurocrine Biosciences (NASDAQ: NBIX). However, each of these positions has less than a 2.5% allocation in the fund.
In simple terminology, the SPDR S&P Biotech ETF offers high potential reward. But you must be willing to take higher risk that comes along with that potential reward.
With that said, and taking the big picture view, the biotechnology sector is likely to continue to provide new medicines that save lives and may in turn continue to reward investors who finance the development of these medicines through biotechnology stocks, mutual funds and ETFs. Therefore the short-term upside potential that comes with the added market risk can be justified when taking a long-term view.
There is also likely to be significant short-term price fluctuations with biotechnology stocks but the long-term growth will be supported as long as there is an aging population that demands advances in healthcare and pharmaceuticals that only biotechnology can produce.
The best biotech ETF for 2015 is the SPDR S&P Biotech ETF. Unfortunately, investing in this ETF won’t give your portfolio exposure to one of the biggest innovations of the biotech sector.
One company is working a on “Smart Pill” that could change the face of modern medicine. The FDA has already approved an early version of his innovative medical solution. And the company behind the next generation “Smart Pill” isn’t owned by the SPDR Biotech ETF. To get the full story on this opportunity, just click here now.
As of this writing, Kent Thune did not hold a position in any of the aforementioned securities. Under no circumstances does this information represent a recommendation to buy or sell securities.