Make Money in Promising Biotech Stocks the Easy Way

Exchange-traded funds offer a convenient way to invest in sectors or niches that interest you. If you expect the biotech industry to thrive as scientists develop more drugs to treat our aging population, the iShares Nasdaq Biotechnology ETF (NYS: IBB) could save you a lot of trouble. Instead of trying to figure out which companies will perform best, you can use this ETF to invest in lots of them simultaneously.

The basics
ETFs often sport lower expense ratios than their mutual fund cousins. The biotech ETF's expense ratio -- its annual fee -- is a relatively low 0.48%.

This ETF has a bit of a mixed performance record, slightly behind the S&P 500 (INDEX: ^GSPC) over the past three years, on average, beating it handily over the past five, but lagging it over the past 10. As with most investments, of course, we can't expect outstanding performances in every quarter or year. Investors with conviction need to wait for their holdings to deliver.

With a low turnover rate of 13%, this fund isn't frantically and frequently rejiggering its holdings, as many funds do.

What's in it?
Several of this ETF's components made strong contributions to its performance over the past year. Seattle Genetics (NAS: SGEN) gained 23% and sports a handful of drugs in development in its pipeline. Of great interest is a lymphoma drug that has received accelerated approval status from the FDA. (When it comes to biotech companies, the FDA can make or break them -- though you still have to follow up approvals with sales, as we were reminded when Dendreon (NAS: DNDN) plunged some 65% earlier this year.)

Vertex Pharmaceuticals (NAS: VRTX) advanced 15%, partly on the strength of its hepatitis C treatment, which enjoys a better than 75% market share. Now its drug will compete with that of Merck, as well as other drugs that will emerge from development. Gaining 30% was Onyx Pharmaceuticals (NAS: ONXX) , as it settled a long-standing lawsuit with Bayer that will deliver buckets of useful cash. Some think the company may be an attractive acquisition.

Other companies didn't add as much to the ETF's returns last year, but could have an effect in the years to come. Teva Pharmaceutical (NAS: TEVA) lost 24%, but it remains a generic drug powerhouse, with more than 1,000 drugs in its massive pipeline. Hurting it this year was the disappointing performance of an oral multiple sclerosis drug.

The big picture
Demand for new medicines isn't going away anytime soon. A well-chosen ETF can grant you instant diversification across any industry or group of companies -- and make investing in and profiting from it that much easier.

Learn aboutthe best dividend ETFs. And if you're looking for some great investments beyond ETFs, consider these10 stocks for your retirement portfolio.

At the time thisarticle was published Longtime Fool contributorSelena Maranjianowns shares of Teva Pharmaceutical Industries, but she holds no other position in any company mentioned.Click hereto see her holdings and a short bio. The Motley Fool owns shares of Dendreon and Teva Pharmaceutical.Motley Fool newsletter serviceshave recommended buying shares of Teva Pharmaceutical and Vertex Pharmaceuticals. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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