In today’s volatile markets, it’s more important than ever to seek out sectors that have potential to grow regardless of continuing difficult economic conditions. One such sector is biotechnology, which I believe could be the internet of the next decade.
With the aging of the baby boom coupled with advances in the study of the human genome, the opportunities in health care and biotechnology could be dramatic because the laws of supply and demand will be in full force over the next two decades. Demand for health care will soar with the aging of the baby boom while supply will shift from traditional, expensive, curative therapies to newer preventive and specialized biotechnology therapies designed to prevent disease or reverse its course after it has started.
The rush to investment in the biotech field has already started with it being the largest investment sector in 2009 with more than $3 Billion going into IPOs in the field. Today there are more than 150 biotech companies and new IPOs are coming to the market all the time.
As with any nascent technology, the challenge for investors and speculators is to discover which of these small caps might be successful. And, of course, this is where Exchange Traded Funds come into play, because with an ETF you don’t have to find the right company but can still profit from advances in this exciting sector by using an ETF that gives you exposure to a basket of companies in the sector.
The two most well known and widely traded Exchange Traded Funds in the Biotech sector are SPDR S&P Biotech (NYSE:XBI) and iShares NASDAQ Biotechnology (NASDAQ:IBB) while another option is First Trust NYSE Biotechnology (NYSE:FBT).
XBI is a widely traded ETF designed to duplicate the performance of the biotech sector by tracking the S&P Biotechnology Select Industry Index that represents the biotechnology subset of the S&P Total Market Index.
In the chart above we can see that XBI is in a solid uptrend and above both its 50 and 200 Day Moving Averages and on a “buy” signal with the MACD in an uptrend.
IBB, the offering from iShares tracks the NASDAQ Biotechnology Index, is also widely traded with major holdings in Amgen (NASDAQ:AMGN), Teva Pharmaceutical (NASDAQ:TEVA), Gildead Sciences (NASDAQ:GILD), Celgene (NASDAQ:CELG) and Biogen (NASDAQ:BIIB).
So if your eye is on the future and “the next big thing,” biotech could be a good place to look. And if you want to eliminate single stock risk from your portfolio, biotech Exchange Traded Funds could be a good option for your consideration.
John Nyaradi is the author of Super Sectors: How To Outsmart the Markets Using Sector Rotation and ETFs.