Rummaging through small-cap biotechnology companies, investors can pick out the next break-through drug provider, but it also leaves you exposed to potential flubs. Instead, exchange traded funds offer diversified basket to the growing sector.
“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,” according to Morningstar analyst Robert Goldsborough. “As such, we think investing in the industry via an exchange-traded fund makes a lot of sense; it’s a low-cost way to gain diverse exposure to the industry in one trade.”
The health care space could benefit from the aging population, rise in chronic diseases due to the older population, growing emerging market demand, new discoveries, increased merger and acquisitions activity, and the implementation of the Affordable Care Act, or “Obamacare,” according to Zacks. [Three ETFs to Play the Outperforming Biotech Sector]
Looking at small-capitalization health care stocks, these companies focus on domestic exposure. Since they don’t have a large international footprint, they rely more on the U.S. economy, which could be a plus in case the world economy slows. [Tech and Healthcare ETFs: Are They All That We Have Left?]
Moreover, smaller companies tend to experience faster growth, compared to their large-cap counterparts in an expanding economy. However, small-caps also see greater levels of volatility.
The PowerShares Dynamic Biotechnology & Genome Portfolio (NYSEArca: PBE) tries to reflect the performance of the Dynamic Biotechnology & Genome Intellidex Index, which tracks companies engaged in the research, development, manufacture and marketing and distribution of various biotechnological products, services and processes and companies that benefit from scientific and technological advances in biotechnology and genetic engineering and research. The fundamental index picks stocks based on price momentum, earnings momentum, quality, management action and value. PBE has a 0.63% expense ratio.
The fund holds 30 stocks. Top holdings include Gilead Sciences 5.0%, Illumina 4.9%, Amgen 4.8%, Waters Corp 4.5% and Regeneron Pharmaceuticals 4.5%.
Market-capitalization includes large-cap growth 18.2%, mid-cap growth 36.6%, small-cap growth 42.2% and small-cap value 3.1%.
The Biotech & Genome ETF is up 45.9% year-to-date.
The PowerShares S&P SmallCap Health Care Portfolio (NYSEArca: PSCH) tries to reflect the performance of the S&P SmallCap 600 Capped Health Care Index, which follows healthcare companies engaged in providing healthcare-related products and services, including biotechnology, pharmaceuticals, medical technology and supplies, and facilities. PSCH has a 0.29% expense ratio.