Make Money in High-Potential 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 our population grows and ages and more treatments are sought for various health conditions, the SPDR S&P Biotech (NYS: XBI) 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 0.35%.

This ETF has performed reasonably well, lagging the S&P 500, on average, over the past three years, but beating it over the past five. 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.

What's in it?
Plenty of biotech companies had strong performances over the past year. Ariad Pharmaceuticals (NAS: ARIA) , for instance, is up 93%. But the stock was actually up much more not so long ago, and has fallen some after an FDA advisory panel recommended against approval of its ridaforolimus to treat sarcoma cancer. Investors remain hopeful, though, about its drug ponatinib, in development for treating leukemia.

Other companies didn't do as well last year, but could see their fortunes change in the coming years. Dendreon (NAS: DNDN) , like many biotech companies, has been very volatile, shedding 76% over the past year. Its expensive prostate-cancer drug Provenge was approved, but sales were slow at first, and then the company ran into production challenges. Now some worry about competition from Johnson & Johnson.

Vertex Pharmaceuticals (NAS: VRTX) shrank by 24%, as some investors worry that if its hepatitis C drug Incivek works so well that the virus is eliminated, patients will no longer need the drug. Still, Incivek is selling briskly, and bulls are quite excited about the prospects for Vertex's cystic fibrosis drug, Kalydeco. It also turned cash-flow-positive recently, and Incivek is being tested in combination with other drugs, to address other conditions, so there's much reason to be hopeful.

Human Genome Sciences (NAS: HGSI) plunged 74%, meanwhile, as sales for its lupus drug Benlysta haven't been as strong as some had hoped. (The drug has no competitors, which bodes well.) Some are waiting to see if the company will be bought out -- perhaps by GlaxoSmithKline, but that's merely speculation at this point.

The big picture
Demand for biotech products 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 about 4 ETFs You Can Count On. And if you're looking for some great investments beyond ETFs, consider these 5 Stocks Growing Their Dividends by 20% Per Year.

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

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