Biotechnology stocks present opportunities, but given the unique challenges of the sector, exchange traded funds (ETFs) may be the better route to go if you’re considering making an investment.

Owning individual biotechnology companies can be a challenging way to invest in the sector, as many of the current companies so not have enough money to stay in business past 2010. Also, any bad news regarding a company’s clinical trials can quickly put shareholders in the red, says Ron Rowland for Invest With An Edge.

Given those challenges, a biotech ETF can help spread the risk in the sector around some. It’s a challenge to pick one or two winning stocks within a sector, especially one such as biotech. While the industry was profitable in 2008, there is expected to be some consolidation. A recent Ernst & Young report revealed that 20% to 25% of firms have less than one year’s worth of capital left; others suspect this figure could be as high as 50%.

The sector has potential, though, and 27 different states are currently in a battle to entice biotech companies to their cities. And the recent repeal of the ban on federally funded stem cell research could lead to major innovations within the sector. Scientists are also scrambling to find a wheat plant resistant to the Ug99 fungus, which threatens to wipe out 80% of the world’s wheat crop.

As of now there are six biotech ETFs to choose from. They differ from each other by holdings and by weightings, so it is important for each investor to look under the hood of each ETF. Expense ratios may vary as well, as this also eats into returns, so consider these factors before going in.

  • iShares Nasdaq Biotechnology Trust (IBB): down 3.5% year-to-date

Other biotechnology-focused ETFs include:

  • HOLDRs Biotech (BBH): up 2.4% year-to-date
  • SPDR S&P Biotech (XBI): down 10.9% year-to-date
  • First Trust Amex Biotech Trust (FBT): up 0.9% year-to-date
  • PowerShares Dynamic Biotech & Genome Portfolio (PBE): down 4.8% year-to-date
  • PowerShares Global Biotech Portfolio (PBTQ): down 2.7% year-to-date

For more stories on biotechnology, visit our biotechnology category.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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