This Day On The Street
Continue to site right-arrow
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
TheStreet Open House

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) Rydex Biotechnology 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) ProFunds Biotechnology UltraSector . 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.

3 of 3

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
DOW 16,974.31 -31.44 -0.18%
S&P 500 0.00 -2.75 -0.14%
NASDAQ 4,549.2260 -15.0680 -0.33%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs