Shares of VPHM soared 25% thanks to the premium paid by Shire for this company, which among other things has a successful ADHD medication in its current arsenal of drugs.
Investors who love the instant pop of a biotech buyout salivate over deals like this, and often it spurs traders to stake out a position in what they expect to be the next big thing in biotech.
But rolling the dice on individual biotechnology companies or pharmaceutical stocks can be a risky scenario — especially if it involves development-stage companies that are bleeding cash in anticipation of an FDA approval, and currently lack any profits as they wait to bring medical products to market.
These companies can and often do go to zero when that long-awaited approval is either delayed or never comes.
So why shoulder the big risk of playing individual biotechs when there is a safer way in biotech ETFs?
3 Top Biotech Funds to Buy Now
If you’re looking for a diversified way to play biotech, here are some ideas:
- The iShares Nasdaq Biotech ETF (IBB) holds a position in some small biotech stocks as well as some of the bigger players in the space like Regeneron (REGN) Gilead Sciences (GILD) and Amgen (AMGN). However, it also has a stake in smaller players that will break out, like Isis Pharmaceuticals (ISIS), which has tripled since Jan. 1.
- The S&P Biotech ETF (XBI) is benchmarked to an S&P biotechnology index and shares some of the same big stocks as the IBB. However, its top five holdings right now are all valued at less than $5 billion in market cap, including Keryx Biopharmaceuticals (KERX), a $1 billion player up about 370% year-to-date in 2013.
- The Powershares Dynamic Biotechnology & Genome Portfolio (PBE) has fewer than 30 total components, with some big guys like Gilead but also some smaller players. And because of the small list of holdings, PBE is pretty heavily weighted in these smaller biotech stocks — such as Insys Therapeutics (INSY), a company worth less than $900 million but comprising almost 5% of the total portfolio.
There still is big risk in biotech ETFs, so don’t think you’re getting off without any losses should a bear market strike or the sector take a hit. However, it seems much more prudent to spread your risk around this highly volatile sector with an ETF rather than chase individual biotech stocks for a buyout bump.
More on Biotech Buyout Investments
- More details about the Shire-ViroPharma deal. (Bloomberg)
- A rundown of the IBB fund. (iShares.com)
- Learn more about the bitoech SPDR. (SPDRs)
- Details on the PBE. (PowerShares.com)
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. Write him at firstname.lastname@example.org or follow him on Twitter at@JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.