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One of the sectors which has remained in the limelight in 2013 is healthcare, and biotechnology in particular. This space has led the broad market for most of the first half of 2013, and has been continuing its incredible run into the second half of the year as well (read: Top ETFs of the First Half of the Year).
With ever-increasing healthcare spending and an insatiable demand for new drugs, the biotechnology sector looks poised for good growth going forward. Furthermore, the U.S. biotech sector represents an attractive investment opportunity thanks to increased M&A activity. This helped the sector to be one of the top performers in 2012 and the trend continues this year.
Biotech stocks were earlier taken as companies poised to treat an illness, but the real picture is much bigger than that. The Nasdaq Biotechnology Index (^NBI) hit a record high and is now up over 45% this year, as these companies find new and innovative ways to improve patients’ lives (read: Biotechnology ETF Investing 101).
The Risks Involved
Though investing in this sector looks alluring, the risk here is huge. The securities in this sector are largely driven by the Food and Drug Administration (FDA). If a company gets a drug approved by the FDA, its stock may gain pretty well but any regulatory failure may weigh heavily on the stock.
How to Play?
One of the possible ways to reduce investing risk in the sector is to track a basket of companies in order to spread out risks. That way, if there is a negative result, it doesn’t bring down the whole investment, though positive performances are obviously dulled as well.
The bullish fundamentals of the sector make it important to find a top ranked pick in this segment. In order to do this, investors can look at the Zacks ETF Rank and find the top biotech ETF (read: Play Surging Health Care with These Small Cap ETFs).
About the Zacks ETF Rank
The Zacks ETF Rank provides a recommendation for the ETF in the context of our outlook for the underlying industry, sector, and style box or asset class. Our proprietary methodology also takes into account the risk preferences of investors. ETFs are ranked on a scale of 1 (Strong Buy) to 5 (Strong Sell) while these also receive one of the three risk ratings, namely, Low, Medium or High.
The aim of our models is to select the best ETF within each risk category. We assign each ETF one of the five ranks within each risk bucket. Thus, the Zacks ETF Rank reflects the expected return of an ETF relative to other products with a similar level of risk (see more in the Zacks ETF Center).
For investors seeking to apply this methodology to their portfolio in the Biotechnology sector, we have taken a closer look at the top ranked PowerShares Dynamic Biotech/Genome ETF (PBE - ETF report). This ETF, with a Zacks ETF Rank of 2 or ‘Buy’ (see the full list of top ranked ETFs), is detailed below.
About the PBE ETF
Launched in June 2005, PowerShares Dynamic Biotech & Genome (PBE) is a fund designed to track the performance of the Dynamic Biotechnology & Genome Intellidex Index. The fund generally will invest at least 90% of its total assets in common stocks of biotechnology companies and genome companies that comprise the underlying Intellidex. Since inception the product has amassed $215.6 million in assets.
With holdings of 30 stocks, the fund is moderately concentrated in the top 10 holdings which account for about 47% of its total assets. In terms of market cap, large cap stocks take almost a 40% share in the fund while mid-cap and small-cap securities share the rest. Style-wise, PBE is tilted towards growth stocks, while some share is taken by value stocks as well.
From an individual holding point of view, some of the top holdings include Regeneron Pharmaceuticals, Biogen Idec and Illumina Inc. though no single security accounts for more than 6% of the total.
In terms of industry exposure, about 70% of assets are allocated to biotechnology while 20% are allotted to pharmaceuticals (read: 3 Impressive Biotech ETFs Crushing the Market).
The product is not as popular as its counterparts as it trades in a somewhat sparse volume of just 29,800 shares a day. The fund charges 63 bps in fees and expenses from investors.
PBE may not have been rich in AUM, but it has beaten the titans in the category. The factor which makes PBE alluring is its stellar performance this year. It has given sturdy returns of around 52% on a year-to-date basis, and over 46% in the trailing one-year period.
The Bottom Line
It can be difficult to get a handle on biotechnology companies since they are often small, and are almost always volatile. This makes selecting a basket of biotechs an arguably better way to attack the market.
At a time when investing in individual firms may be risky, investing in ETFs prove to be a safer haven for investors. Investors who wish to reap benefits from this top performing sector may have a look at PBE for exposure. This ETF has been a stellar performer, and it looks to continue this streak heading into 2014 as well.
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