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Your Best Biotech Bet in 2013

Biotech stocks and medical device small-caps are enticing asset classes for most retail investors. And why not? If you pick right, you can see your investment double or triple in a single trading day.

Take Peregrine Pharmaceuticals (NASDAQ:PPHM), which soared 80% on Monday thanks to an updated study on its bavituximab cancer cure. Or Orixigen Therapeutics (NASDAQ:OREX), which added 50% in a week last summer and is up 225% in the past year thanks to its weight loss drug Contrave, among other developments.

Sounds great … unfortunately, the volatility can cut both ways. Horizon Pharma (NASDAQ:HZNP) was at $8 in July and is now at $2.50. Oops.

If you’re a shrewd researcher, there is fertile ground here for picking winners over losers. It involves the arcane rules of the FDA approval cycle, the minutiae of academic research and clinical trials, and a host of other very scientific and jargon-laden reading to protect your investment.

But for those of us who don’t like the hassle and pressure of that kind of reading, there’s an alternative — biotech ETFs that purchase a basket of these stocks to spread around risk.

Take the iShares Biotech ETF (NYSE:IBB), which has top holdings in larger and more established players like Regeneron (NASDAQ:REGN), Amgen (NASDAQ:AMGN) and Gilead Sciences (NASDAQ:GILD) but also holds smaller companies like Akorn (NASDAQ:AKRX) and InterMune (NASDAQ:ITMN). The fund is up an impressive 34% in the past 12 months vs. 16% for the S&P 500 index.

Another option is the Powershares Dynamic Pharmaceuticals Portfolio (NYSE:PJP), which includes majors like Abbott (NYSE:ABT) and Eli Lilly (NYSE:LLY) but also smaller picks that include Endo Health Solutions (NASDAQ:ENDP) and Auxilium Pharmaceuticals (NASDAQ:AUXL). The PJP ETF is up 27% in the past 12 months.

And if you really want to get crazy? Try out the leveraged ProShares Ultra Nasdaq Biotechnology ETF (NASDAQ:BIB). The fund strives to return 2x the Nasdaq biotechnology index benchmark. That fund is up more than 70% in the past 12 months … though it admittedly trades on very thin volume and can whipsaw the other way in a hurry.

Other alternatives include:

  • First Trust Biotechnology ETF (NYSE:FBT)
  • PowerShares Dynamic Biotech & Genome ETF (NYSE:PBE)
  • SPDR Biotechnology Select ETF (NYSE:XBI)

Check out the top holdings and expenses of these funds before deciding which is right for you. But I strongly recommend following the diversification of biotech ETFs instead of picking individual winners on your own.

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Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.

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