Best Biotech ETF to Buy Now

10/20/2014 9:00 am EST

Focus: ETFs

A biotech exchange traded fund is an excellent way to capture profits from the entire industry with just one investment, asserts Kyle Anderson, in Money Morning.

You see, biotech is one of the broadest industries on the market. There are more than 1,000 biotech companies in North America alone. They cover a wide range of sectors including pharmaceuticals, biologics, generics, and medical devices.
It's also one of the most volatile sectors. Individual stocks are subject to wild price swings based on drug approval news. But sitting out this sector means missing the strong upside.

Our favorite biotech ETF is up 27% this year. Meanwhile, the Dow Jones Industrial Average is now in the red, and the Standard & Poor's 500 Index (SPX) is up 1.8%.

The pharmaceutical sector offers huge upside to investors as companies develop new drugs to treat some of the world's most troubling diseases.
 
Biologics are large-molecule compounds created from living organisms. By 2016, they're expected to account for 24% of drug sales globally. They were just 12% of sales in 2004. First, we look at a biotech ETF to avoid.

The iShares Nasdaq Biotechnology Index Fund (IBB) is one of the most popular. Its daily trading volume approaches 1.1 million shares.

But this ETF is just too volatile. It also provides a small dividend (0.17% yield) and invests 59% of its holdings in either large- or giant-cap companies.

In our view, here's a better ETF to buy—First Trust NYSE Arca Biotech ETF (FBT)—which has 20 holdings that are all roughly equal in size, near 5%.

FBT offers a way to play some of the most exciting biotech on the market, including Regeneron Pharmaceuticals (REGN), Celgene (CELG) and Alexion Pharmaceuticals (ALXN). Its biggest holding, United Therapeutics (UTHR) comprises just 6.2% of FBT's assets.

More than 88% of FBT's holdings are US companies. Of those, nearly 65% are medium-, large-, or giant-cap firms. Risk is also limited, with micro-caps comprising just 4%.

FBT has brought shareholders consistent gains throughout the year. Over the last three months, it's up 11%. Year-to-date, it's gained 31.4%. Over the last 12 months, investors have seen a 46% profit. In our view, FBT is the best biotech fund to buy now.

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