Surveying the Landscape of Biotech ETFs

03/21/2007 12:00 am EST

Focus:

Michael Shulman

Editor, Short-Side Trader

Ticker symbols PBE IBB BBH FBT IHI

Michael Shulman, editor of ChangeWave Biotech Investor, looks at some biotech exchange traded funds but says it’s not yet time to buy them.

There are a great many ETFs in the general healthcare space and within the life sciences segment. The place where we want to play (if we decide to play at all) is in specialized funds that focus on the narrow sub-segments of those markets--biotechnology or life sciences. Within these sub-segments are three kinds of funds.

Discretionary segment ETFs [or closed-end funds, such as] the Hambrecht & Quist Life Sciences Fund pick their own stock basket that they feel best represents the life sciences market segment.

[This group was] down 20% in the past year. It's a significant drop with even the best performing in the group--PowerShares Dynamic Biotech and Genome Portfolio (PBE)--losing a couple of points in the past year.

Index ETFs mirror the major indexes tracking biotech--or are very close to doing this. They include iShares Nasdaq Biotechnology fund (IBB), the Biotech HOLDERS (BBH) and the First Trust AMEX Biotechnology Fund (FBT). The choice here is to pick the index you like. If you have a bias towards smaller outfits, pick the AMEX Biotech Fund, and if your inclination is to go with a larger cap, go with one of the other two ETFs I mentioned.

Sub-Segment ETFs are very new. They are only offered by HealthShares, along with a relatively new offering from iShares for Medical Devices.

It is hard to say much about the HealthShares ETFs. They will be volatile due to the small number of holdings and their narrow focus, and will also be relatively illiquid. The iSHARES Dow Jones US Medical Devices ETF (IHI) is up about 4% year-over-year, and has large holdings in large-cap cardio and orthopedic device makers.

I love picking stocks. It's not in my nature to tell people to "not" pick stocks and instead buy a basket. However, my mission is to help us all make money and if I thought there was a really good ETF, I would (in a heartbeat) swallow my pride and write about it.

That ain't the case, yet.

Now, it's true that the narrow sub-segment of ETFs intrigues me, but it is way too early to buy any of them. The iShares Medical Device ETF has potential for the future for us to play momentum in devices, especially as this segment tends to trade as a group.

I may recommend a narrow-segment ETF this year, perhaps as a short or mid-term trade -- especially if momentum swings toward that segment and there are no standout individual companies.

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