NEW YORK (TheStreet) -- Last Friday, European regulators approved the lung drug created by Intermune (ITMN) . As a result of this positive news, shares of the company's stock skyrocketed, ending the day with a gain of more than 140%.
ITMN's single-day performance was staggering. However, given the roller coaster-like nature of the biotech industry, it was not unusual. It is not uncommon to see companies hailing from this region of the market to see dramatic gains and declines due to various events including M&A activity, drug recommendations or rejections, and earnings reports.
While exciting to watch, taking part in such an explosive industry can test the nerves of even the most risk tolerant investors. In the case of biotechnology, the diversification of ETFs can tone down the industry's day to day volatility, making it more attractive as a long-term bet.
By utilizing an ETF, however, investors are not required to give up all of the excitement that comes with this industry. Rather, there are various options investors can choose from which appeal to different levels of risk tolerance.
Investors looking for the most conservative way to capture the performance of this industry can find solace in the
iShares Nasdaq Biotechnology Index Fund
. IBB provides investors with the broadest take on this industry, exposing investors to more than 130 separate positions.
IBB's notable stability lays in the fact that the biggest slices of the fund's index are set aside for the largest, most stable companies hailing from the industry. Rather than relying on the performance of small-cap firms such as Intermune, companies including
act as the main drivers of the fund's performance. These three firms account for approximately 20% of the fund's total assets.
While IBB is appealing to conservative investors looking for a stable approach to this industry, alternative biotech options such as
First Trust Amex Biotechnology Index Fund
PowerShares Dynamic Biotechnology & Genome Portfolio
are more appropriate for investors with a stronger appetite for risk.
Whereas IBB set aside only small percentages of its portfolio to smaller, more volatile members of the biotech industry, within FBT and PBE, many of these same companies are represented among the top positions. For instance, as of Dec. 20, Intermune represented the largest holding of FBT, making up 11% of the fund's index. Comparatively, IBB currently sets aside slightly more than 1% to the high flying firm.
Although their heavier focus on smaller, more volatile companies ensures that FBT and PBE will make them more susceptible to wild day-to-day swings, in 2010 this strategy has paid off. Both funds have managed to handedly outperform the more-conservative iShares competitor throughout the year, returning more than 30% respectively. IBB, meanwhile, has gained 15%.
While fun and exciting to watch, the biotechnology industry can be a treacherous region of the market to navigate from a stock picking perspective. Thankfully, by utilizing the ETF structure, it is possible to tone down the sector's rampant volatility, making it a more manageable option for a long-term investing strategy.
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