One of the sectors which has remained in the limelight in 2013
is healthcare, and biotechnology in particular. This space has led
the broad market for most of the first half of 2013, and has been
continuing its incredible run into the second half of the year as
Top ETFs of the First Half of the Year
With ever-increasing healthcare spending and an insatiable demand
for new drugs, the biotechnology sector looks poised for good
growth going forward. Furthermore, the U.S. biotech sector
represents an attractive investment opportunity thanks to increased
M&A activity. This helped the sector to be one of the top
performers in 2012 and the trend continues this year.
Biotech stocks were earlier taken as companies poised to treat an
illness, but the real picture is much bigger than that. The Nasdaq
Biotechnology Index (^NBI) hit a record high and is now up over 45%
this year, as these companies find new and innovative ways to
improve patients' lives (read:
Biotechnology ETF Investing 101
The Risks Involved
Though investing in this sector looks alluring, the risk here is
huge. The securities in this sector are largely driven by the Food
and Drug Administration (FDA). If a company gets a drug approved by
the FDA, its stock may gain pretty well but any regulatory failure
may weigh heavily on the stock.
How to Play?
One of the possible ways to reduce investing risk in the sector is
to track a basket of companies in order to spread out risks. That
way, if there is a negative result, it doesn't bring down the whole
investment, though positive performances are obviously dulled as
The bullish fundamentals of the sector make it important to find a
top ranked pick in this segment. In order to do this, investors can
look at the Zacks ETF Rank and find the top biotech ETF (read:
Play Surging Health Care with These Small Cap
About the Zacks ETF Rank
The Zacks ETF Rank provides a recommendation for the ETF in the
context of our outlook for the underlying industry, sector, and
style box or asset class. Our proprietary methodology also takes
into account the risk preferences of investors. ETFs are ranked on
a scale of 1 (Strong Buy) to 5 (Strong Sell) while these also
receive one of the three risk ratings, namely, Low, Medium or High.
The aim of our models is to select the best ETF within each risk
category. We assign each ETF one of the five ranks within each risk
bucket. Thus, the Zacks ETF Rank reflects the expected return of an
ETF relative to other products with a similar level of risk (see
more in the
Zacks ETF Center
For investors seeking to apply this methodology to their portfolio
in the Biotechnology sector, we have taken a closer look at the top
PowerShares Dynamic Biotech/Genome ETF (
. This ETF, with a Zacks ETF Rank of 2 or 'Buy' (see the full list
), is detailed below.
About the PBE ETF
Launched in June 2005,
PowerShares Dynamic Biotech & Genome (
is a fund designed to track the performance of the Dynamic
Biotechnology & Genome Intellidex Index. The fund generally
will invest at least 90% of its total assets in common stocks of
biotechnology companies and genome companies that comprise the
underlying Intellidex. Since inception the product has amassed
$215.6 million in assets.
With holdings of 30 stocks, the fund is moderately concentrated in
the top 10 holdings which account for about 47% of its total
assets. In terms of market cap, large cap stocks take almost a 40%
share in the fund while mid-cap and small-cap securities share the
rest. Style-wise, PBE is tilted towards growth stocks, while some
share is taken by value stocks as well.
From an individual holding point of view, some of the top holdings
include Regeneron Pharmaceuticals, Biogen Idec and Illumina Inc.
though no single security accounts for more than 6% of the total.
In terms of industry exposure, about 70% of assets are allocated to
biotechnology while 20% are allotted to pharmaceuticals (read:
3 Impressive Biotech ETFs Crushing the Market
The product is not as popular as its counterparts as it trades in a
somewhat sparse volume of just 29,800 shares a day. The fund
charges 63 bps in fees and expenses from investors.
PBE may not have been rich in AUM, but it has beaten the titans in
the category. The factor which makes PBE alluring is its stellar
performance this year. It has given sturdy returns of around 52% on
a year-to-date basis, and over 46% in the trailing one-year period.
The Bottom Line
It can be difficult to get a handle on biotechnology companies
since they are often small, and are almost always volatile. This
makes selecting a basket of biotechs an arguably better way to
attack the market.
At a time when investing in individual firms may be risky,
investing in ETFs prove to be a safer haven for investors.
Investors who wish to reap benefits from this top performing sector
may have a look at PBE for exposure. This ETF has been a stellar
performer, and it looks to continue this streak heading into 2014
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BIOGEN IDEC INC (BIIB): Free Stock Analysis
ILLUMINA INC (ILMN): Free Stock Analysis Report
PWRSH-DYN BIO (PBE): ETF Research Reports
REGENERON PHARM (REGN): Free Stock Analysis
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