Over the last decade, the healthcare sector has produced a healthy total return of approximately 10% per annum, and the construction of the index had a variable exposure to biotech stocks during the period. 10% per year isn’t bad, but that return stream falls far short of the 16% per annum that the investor could have made if he or she had been willing to invest solely in the biotechnology industry. And if the investor made the investment through an ETF, he or she garnered the extra returns in a diversified manner and without taking on the idiosyncratic risk of a few individual biotechnology names that are prone to boom and bust.
Industry rotation has its own set of risks and may not be for everyone. But for investors with the skills and willingness to dig a little deeper, there is no doubt that it can add value over time.
Chart courtesy of StockCharts.com