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Does This ETF Exceed the Sum of Its Parts?

We look at how a biotech ETF holds up in an iffy climate for those stocks.

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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 (BBH) exchange-traded fund.

Taking Stock
Larger-cap biotechs have been hurt by concerns about drug safety and new competition. For example,  Amgen (AMGN) shares have taken a beating due to safety concerns, tightened Medicare reimbursement for its anemia drugs, and fears that reimbursement for other therapies--particularly innovative cancer drugs--could also be curtailed in the future. Investors are also beginning to fret about the looming entrance of generic biologics into the U.S. market, though we think fears of rapid adoption and severe markdowns are overdone (as the requirements for approval will likely be individualized for each drug).

Karen Andersen does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.