The rally in biotechnology exchange traded funds is going vertical in early 2012 with the sector’s largest ETF posting a gain of 20% over the past three months.
The $1.5 billion iShares Nasdaq Biotechnology Index Fund (IBB) is breaking out to new all-time highs. The ETF is up 9.6% year to date, compared with a 4.1% gain for the S&P 500, according to Morningstar.
Top portfolio holdings include Amgen (AMGN), Celgene (CELG), Gilead (GILD) and Biogen (BIIB).
“The upside here is that large pharmas will continue to acquire these companies so long as their own R&D departments are starving. They have tons of cash and a burning desire to add pipeline — which makes almost every publicly-traded biotech a target for someone,” writes Josh Brown at The Reformed Broker.
He notes the biotech ETF has a “very concentrated portfolio” with more than 50% of assets in the top 10 holdings. “This is all very bullish action but investors with a weak risk tolerance need to be careful of course — this ain’t your daddy’s healthcare index fund,” Brown said.
Still, the ETF allows investors to buy a basket of biotech companies and reduce the risk of a single stock blowing up.
“Investors seeking exposure to the highly uncertain but potentially promising prospects of the biotech industry can consider adding iShares Nasdaq Biotechnology to their portfolios as a tactical satellite position to a diversified equity portfolio,” writes Morningstar analyst Robert Goldsborough in a profile of the ETF.
Almost 25% of assets are small-cap names applying innovative techniques to research, develop, and commercialize various drugs targeting certain diseases or therapeutic niches, he added.