Investors in biotech have the potential to reap tremendous rewards, but at the same time, the risk can be enormous -- sometimes in the same stock.For example, an investor in Neurocrine Biosciences ( NBIX) could have gotten into the stock below $5 in 1999. Neurocrine topped out at $73 in March of this year. However, after the FDA failed to approve its insomnia treatment Indiplon and after partner Pfizer ( PFE) walked away from the drug, Neurocrine's stock crashed, closing Wednesday at $9.23. Mutual funds have long been a preferred method for investors to diversify their holdings, but there aren't too many biotech-oriented options. I found 10 funds that invest most of their assets in biotech. Several others have significant exposure to the sector but also invest heavily in medical devices, pharmaceuticals and health care stocks. Christopher Davis, a fund analyst with Morningstar, suggests one of these broader health care funds for investors who want exposure to biotech. That way, a negative ruling by the FDA on a biotech stock doesn't wreck your portfolio. He points to ( PRHSX) T. Rowe Price Health Sciences as one of his favorites. Of the fund's portfolio, 43% is invested in biotech stocks. "It has a more aggressive approach and looks for faster-growing companies than some of its competitors," he said. As of March 31, four of its top five holdings were biotech -- Gilead Sciences ( GILD), Amgen ( AMGN), Genentech ( DNA) and Cephalon ( CEPH). That's pretty much what you'll find in most biotech funds, and ETFs for that matter, says Davis, and that is why he recommends avoiding the sector-heavy funds to begin with. "Chances are, you have exposure to these companies through your other mutual funds," he says. "Every large-cap growth fund owns Amgen and Genentech." Plus, the mutual funds in the sector tend to be expensive. The ones that aren't appear to have managers with less-than-stellar track records.
Another WayThere 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.|