ETF Talk: Watching the Dip in Biotech

An open question is what effect President Obama’s health-care plan will have on biotechnology companies. There are no guarantees that provisions of the proposal that aim to increase research funding and the number of people covered by insurance will be approved. Nor is it assured that biotechnology companies will see their sales and profits rise from such legislation. That uncertainty not only raises the risk of investing in the biotechnology sector, but it also brings about potential rewards.

As doubts have arisen in recent weeks about whether much of the Obama plan will become law, the biotechnology sector has pulled back. But the sector also could rally once the ultimate fate of the Obama health plan comes into view. The president certainly is putting his political capital on the line to pass some form of the plan. However, what ultimately happens also will hinge on Congress and the influence of voters, including the significant number of them who have attended town hall meetings across the country to voice their concerns.

If you are willing to be a little patient, the biotechnology sector’s outlook could sharpen in the coming weeks and months. For those of you who are interested in biotechnology investments, here are two exchange-traded funds (ETFs) that you may want to check out.

One of them is iShares NASDAQ Biotechnology (IBB), a fund that seeks investment results that correspond to the price and yield performance, before fees and expenses, of companies that are represented by the NASDAQ Biotechnology Index. This is a well-established fund that was launched in February 2001, has amassed net assets of $1.60 billion and favors medical-biomedical and gene companies with 63.17% of its investments. Its expense ratio is 0.48%, much less than your typical mutual fund.

A second ETF to watch is the SPDR S&P Biotech (XBI), a fund that attempts to closely match, before fees and expenses, the returns and characteristics of the S&P Biotechnology Select Index. That index tracks all of the U.S. common stocks listed on the NYSE, AMEX, NASDAQ National Market and NASDAQ Small Cap exchanges. The fund started in January 2006, so it is newer than IBB, but it already has more than $400 million in net assets. It’s top five holdings include Amgen, Gilead Sciences, Celgene, Vertex Pharmaceuticals and Alexion Pharmaceuticals. Its expense ratio is 0.35%, a bit lower than IBB and significantly less than typical mutual funds.

As the preceding chart shows, XBI has shown weakness in recent weeks, as has IBB. The pullback in the share-price of both ETFs presents investors looking to enter the sector with an opportunity to do so at a reduced price.

I am not recommending any biotechnology funds right now. However, they may be worth watching to see when they bottom out — and when they could potentially begin rising again.

As always, I am happy to answer your questions about ETFs. To send me your queries, please click here. You may see your question answered in a future ETF Talk.