The Safest And Smartest Way To Play The Biotech Breakout

As you know, biotech stocks have been on a tear lately…

Why? Because new drugs need to be developed to fight Covid-19!

As you can guess, Wall Street is gobbling up shares in these companies like a kid gobbles up his Halloween candy.

The Nasdaq Biotech index (which measures the sector as a whole) is up roughly 40% since the March market selloff. And individual biotech stocks are up way more.

In fact, I’ve delivered my readers verified gains of 199%, 226%, 233%, 348%, 379%, 641% and 648%. This year!

You just can’t find a hotter sector now, or for the foreseeable future.

So what’s the safest and smartest way to play this trend?

Hint: It’s not via the most popular choice, the iShares Nasdaq Biotechnology ETF (IBB).

Why Gamble When You Can Invest Safely?

As I shared in previous columns, Covid-19 brought about a permanent shift in investor sentiment and behavior.

In short, it’s made investing in biotech a requirement, not an option. The masses are figuring this out, too.

As The Wall Street Journal reports, “Small investors are betting on biotech companies looking for Covid-19 breakthroughs… it’s like being in Vegas without the hangover.”

I’m here to tell you that biotech investing doesn’t have to be akin to gambling.

On the contrary, safe, smart ways to invest in the sector exist!

(In fact, tomorrow, I’m hosting a special free event on this subject. During this event, I’ll reveal the secret behind “stock market tracking numbers” and my proprietary 7-step system for identifying triple-digit biotech winners. Make sure you sign up here to get all the details.)

You see, when it comes to safely investing in the sector, I’m convinced the masses are going about it all wrong. Here’s why…

Bigger is Not Better

ETFs offer a diverse, low-risk way to gain exposure to any hot trend.

Whether it’s biotech, cybersecurity, or anything else, there’s likely an ETF that tracks the trend, and tracks the companies at the center of it.

As such, ETFs represent a simple way to gain exposure and ride the momentum. But not all trends or ETFs are created equal.

You see, when it comes to the biggest trends like biotech, there are multiple ETF options.

Often times, investors bemoan the work required to sort through them. So they simply hit the “easy button” by buying the biggest and most well-known ETF.

But if your goal is to maximize profits while minimizing risk — which it should be — that would be a big mistake. Let me use the biotech trend to prove it…

Strictly by the Numbers

If we look strictly at the numbers, IBB is hands down the biggest and most popular choice for trend traders in biotech.

It has $9 billion of assets under management and trades over three million shares per day, on average. There’s no bigger and more liquid biotech ETF in existence.

Strictly by the numbers, though, IBB isn’t the best performer or the smartest option.

Instead, I prefer the SPDR S&P Biotech ETF (XBI) and the Principal Healthcare Innovators Index ETF (BTEC).

I prefer XBI for two reasons.

First of all, it’s cheaper, with an expense ratio of 0.35% versus 0.46% for IBB.

But more importantly, XBI employs a “modified equal weighting” scheme that provides more exposure to smaller biotech companies than IBB.

Make no mistake, smaller is always better when it comes to biotech.

You see, the biotech stocks making the biggest moves aren’t the behemoths like Pfizer or Novartis or Merck. They’re earlier stage, smaller-cap biotechs.

As I’ve shared before, these are also the companies on the receiving end of richer and richer takeover offers.

Over the past five years, big pharma paid an average of 67% over the target company’s stock price. But now the average is more than 115%.

So if we want to maximize our profit potential in biotech, while minimizing our risk by diversifying via an ETF, we should look for options that are more heavily concentrated in small biotech stocks.

And that’s where BTEC really shines.

This ETF is geared toward finding the smallest and most innovative companies, with a focus on early-stage research and development.

To do so, its screening process automatically excludes the 200 biggest pharma and biotech companies. But that doesn’t mean it’s super risky.

With investments in approximately 260 smaller biotechs, this ETF is well diversified, and furthermore, it offers cheap exposure with an expense ratio of 0.42%.

Let’s Go to the Charts

If you need extra convincing about the merits of going small to win big in biotech, check out the performance data for the three ETFs we’ve covered today.

As you can see in the chart below, both XBI and BTEC significantly outperformed the wildly popular IBB, proving once again that it pays (way) more to find undervalued and under-followed investment options. Particularly in biotech.

And again, if you’d like to learn the secret to identifying individual biotech stocks with the potential to soar 233%, 348%, 379%, 641%, and even 1,311% or more…

Make sure to register for my free event tomorrow.

Otherwise, if you simply want to gain exposure to this trend via an ETF, make sure you shun the obvious choice, and go for the smarter and better performing investment options I shared today.

Ahead of the tape,

Lou Basenese