You may hear talk about Biotech ETFs being popular right now, so it is worth going over what they investments actually are, and how to decide if one is right for you.
Firstly, an ETF is an Exchange Traded Fund. The principle here is that you spread your money over a market sector. Instead of buying stocks in one company you join a fund which tracks a number of stocks from different companies, the idea being that you are less exposed if the price falls on a certain company stock while you benefit from overall increases in the market sector.
Secondly, we need to discuss the biotech industry. This is made up of companies who use biotechnology to create the likes of medicines, diagnostic products and agricultural products. It is a market sector which many see as having enormous growth potential in the near future, but as is any such industry where new technology and undefined potential are combined it is clear that not all biotech companies will succeed.
The idea of biotech ETFs then is a good one; spreading your money across an industry which could throw up some big winners and some big losers. But how do you decide which biotech ETF to choose?
If you are planning to invest in biotech ETTs then it is worth taking your time to find out what companies are included in the ETF and how it split between the industries big, established companies and smaller, emerging companies.
One of the main biotech ETFs and the one which has the widest selection of stocks is Ishares NASDAQ Biotechnology, which covers over 170 shares, with the only major omission among the big hitters in the industry being Genentech. This is generally regarded as the safest option on the market, while it does have a number of smaller companies who could potentially give big profits in the future but could also drag down the overall yield.
At the opposite end of the spectrum is Biotech HOLDRs, which holds less than 20 stocks and with more than half of the fund taken up by two of the major industry figures, Genentech and Amgen. The presence of the two big companies may be reassuring to some people but in such a potentially volatile industry many investors may see this as offering too little diversity.
First Trust AMEX Biotechnology offers 20 stocks but appears to have a more balanced book than Biotech HOLDRs. However, it does also include a couple of companies who have not always been great performers and in such a small selection you might find this too much of a risk.
The remainder of the big biotech ETFs; SPDR Biotech ETF and PowerShares Dynamic Biotech & Genome are located between the extremes mentioned above, with a reasonably wide selection of stocks and big and small companies.
Above all you should take the time to do the necessary investigation and choose the biotech ETF which most suit your investment strategy and which offer the risk level you are most comfortable with.