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Biotech Funds: Enter With Care

Companies like Crucell (CRXL), a Dutch developer of vaccines and antibodies with a $793 million market cap, are in the mutual fund's top 25 holdings. Crucell lost $19 million in 2005, its sixth consecutive annual loss. No Wall Street analysts cover the firm. But it's this kind of company that has the most potential to provide the fund with peer-beating performance.

Of course, those companies are also fraught with risk, but while traveling potentially rocky roads, a guide like Isaly is very helpful. The question is whether it's worth 5.75%.

(RYOIX) is a quantitative fund, but you need $25,000 to invest. There are other classes with lower minimums, but you'll pay a deferred load and an outrageous 2.36% expense ratio.

Even the main fund's 1.34% expense ratio seems a bit high, considering investment decisions are left to mathematical formulas as opposed to research on drugs and marketplaces. Year to date, the fund is down more than 10% and has underperformed on a three- and five-year basis.

Raging biotech bulls with a bunch of cash who want to speculate can consider (BIPIX). This fund requires a $15,000 minimum, but if biotech does well, the fund should do exceptionally well.

ProFunds Biotech seeks results that correspond to 150% of the Dow Jones U.S Biotechnology Index. No surprise, then, that year to date the fund is off more than 14%. Its three-year return of 8.86% is nearly double its peer average. Keep in mind that Amgen makes up 24% of the portfolio and Genentech another 11%.

Another Way

There are four biotech ETFs. If your goal is exposure to the sector without the heavy influence of the large-caps, your best bet is probably the new SPDR Biotech (XBI). While it's not yet terribly liquid, its low expense ratio and focus on mid-cap stocks make it a more likely candidate for significant upside.

The ETF's largest holdings include MannKind (MNKD), a cancer and diabetes therapeutics company with no meaningful revenue, and Cubist Pharmaceuticals (CBST), which makes treatments for skin infections. Genentech doesn't show up in the holdings until No. 16.

Overall, only your speculative money should probably find its way to the biotech sector. With the ability to lose half its value on a single news item, the risk to an individual stock is considerable. Even the mutual funds are susceptible to significant haircuts.

Considering the expense and likely redundancy, investors are probably better off putting their money in a growth fund that holds a considerable amount of Amgen or Genentech or a broad health-sector fund like T. Rowe Price Health Sciences. Then, if you want to swing for the fences, keep a little on the side for individual ideas.
Putting Biotech Funds to the Test
Here's how they compare
Name Symbol Expense Ratio Load YTD Return 3 Yr Return 5 Yr Return Min Inv. Notes
Allianz RCM Biotechnology DRBNX 1.60% None -9.21% 1.13% -1.89% $5,000 56% of assets in top 10 holdings
Eaton Vance Worldwide Health Sciences ETHSX 1.56 5.75% -4.62% 4.16% 3.06% $1,000 70% invested in biotech
Fidelity Select Biotechnology FBIOX 0.97% None -4.45% 5.44% -0.21% $2,500
Franklin Biotechnology Discovery FBDIX 1.25% 5.75% -8.77% 5.23% -0.71% $1,000
Genomics Y GENEX 1.90% 2% deferred -8.23% 5.82% -6.76% $5,000 $7 mil in assets. Genentech 13% of portfolio.
Live Oak Health Sciences LOGSX 1.15% None -12.68% 5.06% 1.56% $2,000 $29 mil in assets. Diversified but majority invested in biotech.
ProFunds Bio. UltraSector BIPIX 1.58% None -14.50% 8..86% 0.61% $15,000
Quaker Bio. Pharma Healthcare CBPCX 3.06% None -6.08% 3.54% N/A $2,000 Class A has 5.5% load with 2.31% exp ratio
Rydex Biotechnology RYOIX 1.34% None -6.81% 3.86% -1.97% $25,000 C class has $2,500 min with 1% def load and 2.36% exp ratio.
Saratoga Health & Biotechnology SHPAX 2.70% 5.75% -11.23% 2.22% 5.63% $2,500 C class has $10K min with 1% def load and 3.3% exp ratio.
Average 1.70% -8.66% 4.50% -1.33%
Source: Morningstar
In keeping with TSC's editorial policy, Lichtenfeld doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships.

Marc Lichtenfeld was previously an analyst at Avalon Research Group and The Weiss Group and a trader at Carlin Equities. He holds NASD 86,87, 7 and 63 licenses. His prior journalism experience includes being a reporter/anchor for On24 in San Francisco and a managing editor of InvestorsObserver, a personal finance Web site. He is a graduate of the State University of New York at Albany. He appreciates your feedback; click here to send him an email.
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