Our Worry-Free Way of Investing in Biotech


"We are on the cusp of some truly amazing discoveries. There is a tier of biotech companies working around the clock on products with amazing potential."


If there's one sector that's primed for explosive growth right now, it's biotechnology.

Its position as a new market leader in the tech sector cannot be overstated. Clearly, investing in biotech is an idea few can afford to ignore.

Genentech, the first biotech company, was formed in 1973 and was the first to go public in 1980, which launched the biotech sector.

Though the sector is only 33 years old, humans have been using varying forms of biotech for thousands of years, before anyone was investing in anything.

It's not new. All the way back to the Neolithic period, 9,000 or 10,000 years ago, humans began to experiment with agriculture. Farmers selected good strains of emmer wheat, or they domesticated wild aurochs to become modern cattle, or they used two-row barley for brewing beer.

This was biotechnology in its purest form: the application of natural processes and functions to human technology.

In 10,000 years, biotechnology hasn't looked back. Now, in the second decade of the 21st century, biotechnology is accomplishing feats that would have seemed like magic to our forebears.

Nevertheless, we are on the cusp of some truly amazing discoveries. There is a tier of biotech companies working around the clock on products with amazing potential.

One of our favorites is small cap Organovo Holdings Inc (NYSEMKT:ONVO). Organovo's most intriguing product is three dimensional human tissue. It synthesizes human tissue for use by researchers.

The applications are endless. With a limitless supply of human tissue, the testing process for many researchers becomes vastly more doable and simpler. No need to wait for human or animal test subjects, for instance, when needing to test a new substance or technique.

And Amgen Inc. (NASDAQ:AMGN) is a must-own for any biotech investor. It is the world's largest biotech company by revenue—where it is absolutely cleaning up with its innovations. It owns some of the most successful drugs of all time, including Epogen and Neupogen, two drugs that fight anemia and a low white blood cell count. Amgen is on the expensive side, but it still represents a great investment.

Do Your Homework Before Investing in Biotech

You must do your due diligence when investing in biotech. Many biotech issues are small- to micro-cap, with all the volatility and uncertainty, all the dizzying highs and terrifying lows such investing entails.

Before investing in small-cap biotech stocks, you should carefully examine the company's fundamentals, its offerings, and whether or not your portfolio can tolerate the volatility and risk associated with these stocks.

That's not to say that all biotech stocks are volatile small caps, not at all. Small cap investing can be extremely rewarding, and there are plenty of small gems out there.

Sharing an office as I do with the estimable Bill Patalon, who just scored a huge win with the Cubist Pharmaceuticals Inc (NASDAQ:CBST) takeover of Trius Therapeutics, Inc. (NASDAQ:TSRX), I know this very well. Shares of TSRX are still on a rocket ride! And there are plenty of large, well-established (and thoroughly liquid) companies in the business as well.

Investors looking to avoid the thrills and spills of small cap investing might do well to look into some of the exchange-traded funds available with wide exposure to biotech issues.

These ETFs have benefitted from a great deal of money coming into the fund recently, and they are some of the best performers out there.

Investing in Biotech with Index-Crushing Performance

The Market Vectors Biotech ETF (BBH) tracks 25 biotech companies, with a focus on big companies and growth stocks. Some two-thirds of the stocks are large cap. As the ETF has little-to-no yield to speak of, this is not, repeat, not an income play.

But it's an affordable way to get a start on investing in biotech, with some of the biggest and fastest growing biotech issues around, like Gilead Sciences, Inc. (NASDAQ:GILD) and Amgen, Inc. (NASDAQ:AMGN). The performance of these two heavy hitters alone makes shares of BHH an intriguing proposition.

Our own Michael Robinson has written about the iShares NASDAQ Biotechnology Index ETF (NASDAQ:IBB). He points out that it's a fantastic way to get the gains that the entire sector is experiencing right now for comparatively little money. Shares of IBB are a must-have for anyone who considers themselves a high-tech investor.

On the other hand, the First Trust NYSE Arca Biotechnology Index Fund (NYSEArca: FBT) ETF, is generous with its weighting. In fact, it's one of the only biotech ETFs that uses an equal weighting approach.

Of these three ETFs, it has the most exposure to small cap issues. Any investor looking for small cap thrills and gains, while still desirous of the one-stop-shop aspect of an ETF should look very hard at shares of FBT.

Even better, this ETF is loaded with potential takeover targets, as companies that may be low on cash look to do deals with the bigger companies with deeper pockets. FBT has enjoyed an impressive 27.5% gain over the last six months, too.

You don't have to be a small cap cowboy to participate in one of the greatest stories ever to unfold across the markets. These ETFs give you a way to get crucial exposure to this market leader, and leave the S&P 500 in the dust.

We do our homework before recommending ETFs, and you should, too. Here are some critical things to think about when considering which ETF is right for you.

Greg Madison
Money Morning

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