We look at how a biotech ETF holds up in an iffy climate for those stocks.
If there's an industry that should be immune to the recent market turmoil we've seen, it's biotechnology. Although a severe liquidity crisis could crimp biotech firms' access to capital, demand for innovative, life-saving treatments is largely recession-proof.
Yet, biotech hasn't been a port in the storm of late, with biotech stocks turning in a decidedly mixed showing for the year to date. With that in mind, it seems worthwhile to examine the biotech market environment, reassess the factors that can drive short-term volatility, and consider alternative means of exploiting compelling biotech ideas, such as the Biotech HOLDRs
Larger-cap biotechs have been hurt by concerns about drug safety and new competition. For example, Amgen
At the other end of the spectrum, some smaller-cap names have done quite well this year, thanks to a mixture of takeover speculation and positive clinical data. Onyx Pharmaceuticals
These wildly divergent showings, and the factors behind them, offer a vivid illustration of how unpredictable biotech performance can be. While we're mindful not to confuse stock price volatility with fundamental business risk, the biotech business' boom/bust nature subjects even the most-thoughtful forecasts to significant uncertainty. Not coincidentally, we rate all but a handful of the biotech stocks that we cover as "above-average" or "speculative" risk.
Given this risk, it can be worthwhile to consider investing in a basket of biotech stocks as an alternative to a stake in a single stock, as the diversification across names can help to diffuse some of this uncertainty. That is, the whole can exceed the sum of the parts. With that possibility in mind, we thought we'd take a closer look at Biotech HOLDRs, an ETF that spreads its assets across 15 biotech stocks--14 of which we cover here at Morningstar.
Our fair value estimate for Biotech HOLDRs was $1
Our fair value estimate is largely driven by our take on the fund's top two holdings, Genentech