An exchange traded fund indexed to biotechnology stocks has pulled back about 10% from its all-time reached last month as the sector cools after leading the market higher through much of 2012.
"Given the jarring pace of change, single-product liability, regulatory uncertainties, and intellectual property rights, picking biotech-sector stocks is a high-risk/high-reward proposition. As such, we think investing in the industry via an exchange-traded fund makes a lot of sense; it's an extremely low-cost way to gain exposure to the industry in one trade," Robert Goldsborough wrote for Morningstar.
The biotech industry has been susceptible to the patent cliff that began expiring big pharmaceutical companies' patents on major drugs. Health care reform has also been an ongoing issue, and industry tax is another weight. Come 2014, Medicare should be covering more people, which should boost volumes and the drug industry.
The biotechnology industry has benefited from the merger and acquisition activity that has been rapidly taking place within the sector. Many speculate there is more activity to come as Big Pharma looks for cash-hungry biotech companies, reports Goldsborough.
ETFs are one of the best ways to gain exposure to this volatile industry. The biotech companies are still relatively new, making investment in a single company ultra risky. By investing in a basket of biotech companies, the risk is mitigated and the chances of investing in a successful company is greater. This illustrates the need to look at the underlying holdings in such ETFs.
Tisha Guerrero 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.