Betting On Biotech

Published on Friday, 10 February 2012 21:57 Written by Todd Shriber

New York, February 10^th (TradersHuddle.com) – There are multiple ways of approaching investing in the health care space using ETFs. One could take a conservative approach and that would mean embracing ETFs such as the Health Care Select Sector SPDR (NYSE: XLV) or the Market Vectors Pharmaceuticals ETF (NYSE: PPH). Both funds are fine ideas for a risk off environment as both are heavy stocks such as Dow components Johnson & Johnson (NYSE: JNJ), Pfizer (NYSE: PFE) and Merck (NYSE: MRK).

Those are your grandfather's health care stocks and lineups like that make XLV and PPH perfectly suitable for conservative investors. For those looking to up the risk ante a bit in search of search of higher returns, the biotech sector is the place to look and the iShares Nasdaq Biotechnology ETF (NASDAQ: IBB) is one of the ETF’s to consider.

As is the case with Abbott Labs (NYSE: ABT), Johnson & Johnson, Pfizer, and Merck dominating the top-10 holdings of many pharmaceuticals ETFs, biotech funds like IBB are dominated by Amgen (NASDAQ: AMGN), Gilead Sciences (NASDAQ: GILD), Celgene (NASDAQ: CELG) and Biogen Idec (NASDAQ: BIIB). That quartet represents about 25% of IBB’s weight.

Biotech investing means investing in growth stocks and it means volatility. For example, IBB trades at almost 17 times its constituent’s forward earnings. The ETF has a beta of almost 0.9% and an average true range of 2.5. Those numbers are almost unheard of among traditional pharma funds. Those numbers also help explain why IBB is up almost 7.4% year-to-date while funds like XLV and PPH cannot even come close to that performance. In the past year, IBB is up over 78%, nearly six times the returns offered by XLV over the same time.

IBB’s utility is two-fold and it extends beyond heavy exposure to the most familiar biotech names. First, stock picking in the biotech space can be tricky, but IBB is home to almost 120 stocks and that really helps to alleviate the stock-picking burden. Second, the biotech sector is also poised for mergers and acquisitions activity because slower-growing big pharma companies like Pfizer, etc. find it easier to buy new pipelines via acquisition than spend millions of dollars on research and development. With almost 120 stocks, IBB is chock full of potential takeover targets.

In the near-term, IBB would be a bit vulnerable to a broader market retrenchment than XLV or PPH and the biotech fund has started to peel back in recent days. If $115 holds as a support, that could be a valid entry point to play a run to the $125-$130 area.

The vitals: IBB just turned 11 years old earlier this month. The ETF has an expense ratio of 0.48% and almost $1.8 billion in assets under management. Rivals include the SPDR S&P Biotech ETF (NYSE: XBI) and the First Trust NYSE Arca Biotech Index Fund (NYSE: FBT).