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.
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.
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 (NASDAQ: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.
The fund has 65 components. Top holdings include Cubist Pharmaceuticals 6.1%, Questcor Pharmaceuticals 5.9%, Centene 4.6%, Align Technology 4.6% and Parexel International 3.9%.
Market-capitalization includes mid-cap growth 10.6%, small-cap growth 72.9% and small-cap value 16.5%.
PSCH is up 33.9% year-to-date.
The SPDR S&P Biotech ETF (NYSEARCA:XBI) tries to reflect the performance of the S&P Biotechnology Select Industry Index, which represents the biotech sector of the S&P Total Market Index. The underlying index also employs an equal-weight methodology. XBI has a 0.35% expense ratio.
The ETF holds 58 stocks. Top holdings include Alnyiam Pharmaceuticals 3.1%, NPS Pharmaceuticals 3.0%, Incyte Corp. 2.9%, InterMune 2.9% and Celldex Therapeutics 2.5%.
Market-capitalization includes giant-cap, 6.3%, large-cap 7.5%, mid-cap 26.1%, small-cap 36.5% and micro-cap 23.6%.
XBI is up 37.5% year-to-date.
Max Chen contributed to this article.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.