The biotechnology industry is renowned for it boom and bust cycle; investment in this area is not for the faint of heart, cautions Cynthia Andrade, contributing editor to MoneyLetter.
The industry has been on a tear. Over the past year, it has advanced almost 66%, and despite its boom and bust pattern, the sector has trounced the Nasdaq over the past ten years, gaining 231% versus the 126% gain in the Nasdaq.
Biotech stocks soared in 2013, as FDA approvals of new drugs escalated, and investors become more willing to embrace risk. Meanwhile, the IPO market for biotech firms has also been robust; 46 biotech firms completed IPOs in 2013.
Another factor behind the surge is the Affordable Care Act, which will increase the number of health-insured Americans and thereby increase the demand for pharmaceuticals.
This increased access to healthcare is not limited to the United States, as governments worldwide seek to increase healthcare benefits.
The demographic trend to an aging global population also boosts the demand for biotech products. The industry has also benefited from heightened merger and acquisitions activity.
Often, it's the big pharma firms with large cash reserves and dwindling pipelines looking to boost their new product potential.
The iShares Nasdaq Biotechnology Fund (IBB) offers fairly broad exposure to the biotechnology industry; it tracks the Nasdaq Biotechnology Index, which is weighted by market capitalization.
That means the fund, unlike other biotech sector funds that employ an equal-weight strategy, has its greatest exposure to more established and large-cap biotech firms. For IBB, that means it has been less volatile than most other biotech funds.
Looking at the portfolio, 55% of assets are in large-caps, 25% in mid-caps and the remainder in small firms. The fund has 56% of assets in its top ten holdings, which include Biogen (BIIB), Gilead (GILD), Amgen (AMGN), Regeneron (REGN), and Celgene (CELG).
IBB has been a standout performer in recent years and over the longer-term. For the trailing year, its 86.4% gain outpaces 95% of Morningstar's healthcare funds. Over the trailing ten-year period, it surpasses 99% of its peer group.
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