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written by reader Biotech ETFs – IHI, HXE

By mchedester, August 24, 2016

It seems to me that the biotech market is so undervalued right, it’s almost like shooting fish in a barrel at this point. Is anybody out there investing in an ETF? We already know about DR KSS and all of his picks and I own most of them, but do any of you see any value in any ETFs right now? I’m looking at IHI and HXE because they have done well, but I’m even considering buying a leveraged ETF for the first time ever, so I’m interested in any advice in the ETF space. Thanks!

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6 years ago

No advice to offer, and my personal preference is to make individual stock picks, but I can suggest some factors that may influence your thinking in arriving at a decision.

First, you express the opinion that the biotech sector is so depressed, that it is now relatively easy to pick winners. I do not agree with this opinion…it may or may not be the case in clinical research biotechs, as it is possible that investor aversion to risk may be more persistent than we expect, and this may have a more permanent affect on the start-ups in biotech that have potential, but no sales, no revenues, no products, etc etc.. Furthermore, approvals may become more costly and difficult to obtain going forward. This issue does not apply to big pharma, which I would expect to be less volatile than the research and development companies.

So right off the bat, the composition of the ETF comes into play. Is it an across-the-board biotech with holdings in PFE, MRK, NVS, Roche, etc ? Or is it more narrowly focussed on speculative stocks like those discussed in Doc’s columns ?

Second, the large majority of ETFs are purely market cap weighted. In the majority of these funds there is no evaluation whatsoever of the relative merits of the products or prospects of the companies. So if you are comfortable with this, and are making a sector bet, and believe overall sentiment in biotech is going to lift all of the boats, I suppose you could
place your bet with market weight ETFs. Or leveraged ones if you are so inclined.

Now there are a few ETFs and funds that actually have people, presumeably knowledgeable ones, looking at the individual stocks and making discretionary decisions on allocations. Trouble is, I have not been especially impressed when reviewing the specific choices and weightings. I think you stand a better chance in the speculations with Doc’s picks, and you have already stated you own lots of them.

Third, I think as a group the Gumshoe community is way overweight in the clinical speculations compared to the blue chip big pharma companies. I am guilty myself of this. It is partly because of the excitement and genuine interest in the sector and the emerging medical miracles. We are way more interested in a breakthrough technology or medicine. But as investors we should probably be paying more attention and giving more allocations to the Pfizers, Mercks, Celgenes, Gileads, and BMYs of the world. It’s just that they are not as interesting intellectually or as potentially thrilling
return-wise as the SCYXs, ARTHs, AKAOs and CCXIs, and they do not get their proportion of ink in the blogs as a result.

For both the clinical research companies and the bigh caps, I prefer to make my own picks. But as I say, if you want to make a generalized wager on market sentiment in the sector, then ETF’s may have merit.

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