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The 3 Key Factors in Biotech ETF Investing

Although stocks are having a rough year, investors still remain captivated by certain sectors of the market. Undoubtedly one that remains at the top of the list is the biotech space as this corner of the market has been a strong performer even despite the volatility.

However, thanks to recent market conditions biotech has become a choppier investment while concerns over regulation aren't helping matters either. Still, the space is intriguing for many reasons-and especially those in it for the long term-so having at least some exposure probably makes sense for most investors.

Biotech ETFs?

But due to the risks a single stock investment might be inappropriate for most investors. This space more than most is subject to booms and busts where one right-or wrong-stock pick will make or break an investment idea. That is why biotech ETF investing has become so popular as it gets rid of the company specific risk while still allowing exposure to the overall story (read How Hillary Clinton Crushed Biotech ETFs with One Tweet ).

Many investors still don't know the basics here, or the key differences between the many funds that populate that space. That is why I have distilled the market into 3 key factors that every investor needs to know before jumping into this hot corner of the market:

Not All Created Equal

No fund here in the unleveraged space tracks the same index and while some, such as IBB and BBH , follow large cap-focused indexes, others use an equal weight (XBI) or modified ( FBT ) equal weight benchmark. This can have a huge impact on risk and return so investors definitely need to keep this in mind; XBI has actually doubled IBB in the past year largely thanks to its small cap focus (see Biotech ETFs Head-to-Head XBI vs. FBT ).

Study the Index

Other Funds have more stringent criteria for inclusion and do not follow the same rules as the major ETFs listed above. Funds here include BBC which only holds companies that have drugs in clinical trials, or BBP which zeroes in stocks that have already received FDA approval for a drug.

Knowing the index also applies to the leveraged space too as these can drastically alter the risk profile. For example, although UBIO and LABU both over 3x leverage, LABU follows an equal weight benchmark and is thus likely to be more volatile than UBIO (see Intro Guide to Leveraged Biotech ETF Investing ).

Expenses!

Investors often overlook expenses in this corner of the market as most are just hoping for big gains. However, expenses can vary pretty widely in this space and this is definitely something to consider as this can add up for a long-term hold. In fact, the range goes from 0.35%-0.85%, so your total cost can change by a big amount thanks to this factor.

More Information

Want more info on biotech ETF investing? See our short video below for more analysis on the subject!

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Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

SPDR-SP BIOTECH (XBI): ETF Research Reports

ISHARES NDQ BIO (IBB): ETF Research Reports

MKT VEC-BIOTECH (BBH): ETF Research Reports

FT-AMEX BIOTEC (FBT): ETF Research Reports

DIRX-D SP BBULL (LABU): ETF Research Reports

PRO-ULT ND BI (UBIO): ETF Research Reports

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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