iShares Biotech Index ETF: The Best Way to Invest in Biotech

| About: iShares Nasdaq (IBB)

By Marc Lichtenfeld

Sometimes, you just need to put events into perspective.

Not everyone possesses this valuable ability, but my brother is very good at it. Whenever pressure from work gets to him and he finds himself (or other people) stressed, he likes to say, “You’re either curing cancer or you’re not.”

This is a guy who writes advertising copy for the movie industry for a living. He won’t find a cure for cancer there and understands that most of the time, he’s not going to impact people’s lives in a meaningful way.

But as a movie buff and film scholar, he loves his work and is very good at what he does. His job is simply to help sell movie tickets – and that sense of perspective helps relieve the stress when things become intense.

But with the healthcare sector, that perspective is turned on its head – and it’s one of the reasons I love following the group – and in particular, biotech stocks.

After all, these companies are trying to cure cancer… multiple sclerosis… diabetes… Alzheimer’s Disease… heart disease. The list goes on. It’s exciting and emotional. And who wouldn’t want to invest in a company on the verge of a new therapy for a horrible disease?

Here’s a very simple way for you to do that…

An Explosive 10 Years For Biotech

336% Returns And An Extra $15,000 In Your Portfolio

Last week, I had the privilege of speaking at the 10th annual Investment U conference in St. Petersburg, Florida. During my presentation, I discussed how investors need to be aware that early-stage biotech stocks trade on emotion as much as fundamentals.

It’s one of the factors that has led the biotech sector to outperform the S&P 500 over the past decade. The numbers prove it. While the S&P 500 has returned a measly 19.8% cumulatively over the past 10 years – and that number roughly doubles if you include dividends – the Amex Biotechnology Index [AMEX: ^BTK] returned 336.3% over the same period. That’s some outperformance!

I talked about how investors should consider diversifying their portfolio to include biotech stocks – and the best ways to do that. And the benefit of doing so speak for themselves…

Over the past 10 years, a $100,000 portfolio invested in the S&P 500 would now be worth about $141,000. However, if just 5% of that portfolio were allocated to biotech stocks, the portfolio would be worth over $156,000. That’s an extra $15,000 in returns from just 5% of the portfolio.

Here’s a quick n’ easy way to get some biotech exposure…

The Best Way To Buy Biotech

First of all, forget mutual funds. In particular, biotech sector mutual funds have not impressed me over the years, as they tend to be expensive and the performance has been lacking.

These days, ETFs are the dynamic new wave of funds – a subject that my colleague and technical wizard Jim Stanton focuses on here every other Monday in his new “Sector Watch” column. When you have a moment, check it out here – it’s good stuff.

If you want some simple biotech exposure via ETFs, the iShares Nasdaq Biotech Index (Amex: IBB) is an inexpensive way to give your portfolio some biotech diversification, since it tracks the performance of the stocks in the Nasdaq Biotechnology Index.

Two quick points to note, though:

  • Biotech stocks tend to drop in the summer, so if you keep the sector on your radar, you may have an opportunity to get in at lower prices.
  • While biotech stocks can definitely pay off handsomely, understand that the sector has above average risk, so make sure it doesn’t make up too large a portion of your portfolio.

Amgen (Nasdaq: AMGN), Gilead Sciences (Nasdaq: GILD), Celgene (Nasdaq: CELG) and BioMarin (Nasdaq: BMRN) are all members of the Index. Investing in an ETF like this gives you an easy, cheaper and lower risk way to invest in the biotech sector. Of course, make sure you do your due diligence before investing and be sure to allocate a sensible portion of your capital to any investment. As the old investment adage goes, “Never risk more than you can afford to lose.”

Related Articles: