The Best Biotech ETF to Buy Now

By Kyle Anderson, Associate Editor, Money Morning • @KyleAndersonMM • October 13, 2014

A biotech ETF (exchange-traded fund) is an excellent way to capture profits from the entire industry with just one investment.

You see, biotech is one of the broadest industries on the market. There are more than 1,000 biotech companies in North America alone. They cover a wide range of sectors including pharmaceuticals, biologics, generics, and medical devices.

It's also one of the most volatile sectors. Individual stocks are subject to wild price swings based on drug approval news.

But sitting out this sector means missing the strong upside. Our favorite biotech ETF is up 27% this year. Meanwhile, the Dow Jones Industrial Average is now in the red, and the Standard & Poor's 500 Index is up 1.8%.

It's the industry's strong subsectors that have pushed this biotech ETF up so high:

• The pharmaceutical sector offers huge upside to investors as companies develop new drugs to treat some of the world's most troubling diseases. According to Evaluate Pharma, brand-name prescriptions will grow 4% annually through 2018.

• Biologics are large-molecule compounds created from living organisms. By 2016, they're expected to account for 24% of drug sales globally. They were just 12% of sales in 2004.

• Generics or "knock-off" drugs account for 80% of all U.S. prescriptions. And when big pharma companies lose a patent, generic drug firms swoop in. Their shareholders see the profits.

• Finally, medical devices account for a smaller portion of the overarching biotech field, but are profitable nonetheless. In 2013, the FDA approved 30 new devices. We're on pace to see that same growth this year.

Here's a look at the biotech ETF we're recommending now, plus one that investors should ignore...

The Best Biotech ETF to Buy and One to Avoid

First, the biotech ETF to avoid.

The iShares Nasdaq Biotechnology Index Fund (NYSE: IBB) is one of the most popular biotech ETFs on the market. Its daily trading volume approaches 1.1 million shares.

But this ETF is just too volatile. Remember, avoiding volatility is one of the biggest reasons for investing in biotech ETFs.

Overall, IBB has brought a return of 18% this year. However, its path to those profits hasn't been smooth.

Between late February and mid-April, IBB shares plummeted 21%. It rebounded 19% in the three months after. Its 52-week range is wide: $191.29 to $280.07.

Yes, it provides a small dividend (0.17% yield) and invests 59% of its holdings in either large or giant cap companies.

But there's a better ETF to buy...

First Trust NYSE Arca Biotech ETF (NYSE: FBT).

FBT has 20 holdings that are all roughly equal in size, near 5%. The biggest holding, United Therapeutics Corp. (Nasdaq: UTHR), comprises just 6.2% of FDT's assets.

"The stocks in the First Trust fund have a median market cap of about $8.4 billion," Money Morning's Defense and Tech Specialist Michael Robinson said. "That's large enough to offer stability but small enough to deliver plenty of upside."

FBT offers a way to play some of the most exciting biotech stocks on the market, including:

• Regeneron Pharmaceuticals Inc.'s (Nasdaq: REGN) main product combats blindness in senior citizens. The company has a $35 billion market cap, 34% operating margins, and return on equity (ROE) of 20%. FBT has 5.2% of its holdings in REGN.

• Celgene Corp. (Nasdaq: CELG) has several cancer drugs on the market right now, and a market cap of $75 billion. CELG has operating margins of 29%, an ROE of 28.6%, and makes up 4.9% of FBT's holdings.

• Alexion Pharmaceuticals Inc. (Nasdaq: ALXN) accounts for 4.8% of FDT's assets. Focused on ultra-rare diseases, ALXN has a market cap of $33 billion, 39% operating margins, and ROE of 16%.

More than 88% of FBT's holdings are U.S. companies. Of those, nearly 65% are medium, large, or giant cap firms. Risk is also limited - with micro-caps comprising just 4%.

FBT has brought shareholders consistent gains throughout the year. Over the last three months, it's up 11%. Year-to-date, it's gained 31.4%. Over the last 12 months, investors have seen a 46% profit. FBT currently trades just below $91 per share.

What to Read Next: Money Morning's Bioscience Specialist has found a biotech stock with breakout potential. It's already soared 700%, but still has room to run. And thanks to a recent media blunder, it's trading at a discounted price right now...

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