Investing in individual stocks in the biotechnology sector is not for the faint of heart. Equities in the sector are known for their volatility. The best way to invest in the sector is to own a basket of equities held in an exchange traded fund (ETF).
Five exchange traded funds in the sector currently trade on U.S. exchanges. Each has unique characteristics.
The most actively traded ETF is the iShares Nasdaq Biotechnology Index fund . It holds a diversified basket of 123 biotech stocks listed on the Nasdaq exchange. Largest holdings are in Amgen, Teva, Gilead, Celgene, Vertex Pharmaceutical and Alexion Pharmaceutical. Management expense ratio is 0.48 per cent.
State Street Global Advisors also offers SPDR Biotech . It holds a diversified list of 32 stocks that are equally weighted. Management expense ratio is 0.35 per cent. Volume is moderate.
One of the best known ETFs in the sector is HOLDRs Biotech . It was the original ETF in the sector. However, over the years, it has fallen out of favour. The ETF only holds 12 securities and is heavily weighted in three securities: Amgen, Biogen and Gilead. Interest in the ETF has dissipated in recent years. It now is thinly traded.
First Trust offers the NYSE Arca Biotech , which holds 20 biotech stocks that make up the AMEX Biotech Index. Positions in the fund are equally weighted. The AMEX Biotech Index specializes in the drug and pharmaceutical segment of the biotech industry. Management expense ratio is 0.66 per cent. Liquidity is moderate.
PowerShares offers an ETF called the Dynamic Biotechnology & Genome portfolio . The fund holds 30 stocks with an emphasis on small cap companies. Management expense ratio is 0.63 per cent. Units are thinly traded.
The outlook for the sector is encouraging. It has a history of moving higher in anticipation of important health-care conferences, where important news on new drugs is released. The largest annual health-care conference in the world is the American Society of Clinical Oncology (ASCO) conference. This year it is held in Chicago between June 3rd and June 7th. Most of the major biotech companies are expected to participate. ETFs in the sector have a period of seasonal strength from mid-March to the first week in June. Average gain per period during the past 10 periods for the AMEX Biotech Index was 8.6 per cent.
The sector has another reason for moving higher during its current period of seasonal strength. Genzyme recently was acquired by Sanofi Aventis for $74 (U.S.) cash per share plus contingency value rights that could be worth up to $3 per share. At $74 per share, the deal is worth $20.1-billion. Distribution of the cash is scheduled in the second quarter. At least some of the cash is expected to be reinvested in the biotech sector.
On the charts, biotech ETFs have an improving technical profile. Their intermediate trends are up. Most trade above their 50- and 200-day moving averages. Their short-term momentum indicators are recovering from oversold levels. They have outperformed both the S&P 500 Index and the S&P Health Care Index during the past month. Accumulation of ETFs in the sector is recommended for a seasonal trade into the first week in June.
Jon and Don Vialoux are authors of free daily reports on equity markets, sectors, commodities and Exchange Traded Funds. They also are research analysts for JovInvestment Inc. Reports are available at www.timingthemarket.ca and www.equityclock.com. Follow us on Twitter@EquityClock.
Don Vialoux