“The jarring pace of change, single-product liability, regulatory uncertainties, and intellectual property rights make picking stocks in the biotech sector a high-risk/high-reward proposition,” Goldsborough said. “As such, we think investing in the industry via an ETF makes a lot of sense; it’s an extremely low-cost way to gain diverse exposure to the industry in one trade.”
The sector fund has an expense ratio of 0.48%. Other ETFs in the category include SPDR S&P Biotech ETF (XBI), First Trust Amex Biotechnology (FBT) and Market Vectors Biotech ETF (BBH).
The rally in biotech stocks may also be driven by expectations that President Barack Obama’s health care reform plan may be repealed, according to Gunderson Capital Management.
“Since health-care costs are outpacing consumer inflation, government and industry will be seeking myriad ways to cut costs. This means an even greater reliance upon drugs, particularly generics,” Reuters reported in a 2012 outlook. “Patents on brand-name drugs are scheduled to expire in coming years, potentially creating a $100 billion market for generics. Sectors likely to benefit are pharmaceuticals, biotechnology, distributors and drug retailers.”
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Full disclosure: Tom Lydon’s clients own XBI.