Sector Update: Comparing Biotech ETFs

Sector Update: Comparing Biotech ETFs

This is a worthwhile article about biotech ETFs by Richard Sparks over at Schaeffers.

Biotech ETFs are problematic. iShares biotech (IBB) does not own Genentech (DNA) which has caused it to lag Biotech HOLDRs (BBH). IBB is down recently due in large part to the pasting at Biogen (BIIB). If you buy the HOLDRs you are, in theory, taking more risk because BBH is invested in so few names. IBB should be less risky thanks to more diversification yet has lagged for the risk not taken. Some less aggressive clients own IBB while other clients own a big individual stock in the group that has done well but is not DNA.

I am starting to think that biotechs may not lend themselves to ETF investing. If Amgen ever blows up, both ETFs will get crushed. I don't think that will happen but it could. To buy either ETF really requires that an investor learn the Amgen story and decide on its merits. If you do that and decide you like Amgen's prospects it may make sense to just buy Amgen.

This is a tough issue. The one individual name I am exposed to has done well and more importantly I believe in its longer term prospects. It may be smart to switch clients that own IBB into that one name. For the time being those clients are exposed to Biogen and Amgen which in fact may not be great places to be.

As a side note I was lucky enough to own DNA back in May 2003. I sold it into that first huge one day move and thought I was quite smart. Of course I was not smart enough to ever buy it back.