Make Money in Biotech Stocks That Could Surge

Exchange-traded funds offer a convenient way to invest in sectors or niches that interest you. If you expect the biotechnology industry to thrive over time as our global population grows, gets older, and needs more health care, the First Trust NYSE Arca Biotech Index ETF (NYS: FBT) 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 First Trust ETF's expense ratio -- its annual fee -- is 0.60%. The fund is on the small side, too, so if you're thinking of buying, beware of potentially large spreads between its bid and ask prices. Consider using a limit order if you want to buy in.

This ETF has performed well, outperforming the world market over the past three and five years. 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?
Several biotech companies had strong performances over the past year. Amylin Pharmaceuticals (NAS: AMLN) , for example, surged some 105%, partly on news that it's on the block. It sports diabetes drugs Byetta and Bydureon, and is looking to sell them outside the U.S. It might partner with a bigger firm to do so, or it might end up bought out by a company that wants to do that marketing itself.

But plenty of other biotech companies didn't do as well last year -- and they serve as a painful reminder of why it can be good to diversify your money across a handful of biotech companies instead of betting the farm on just one or two.

Dendreon (NAS: DNDN) , for example, plunged some 84%. Its investors have had a wild ride, with its expensive prostate-cancer drug Provenge not being quickly embraced by doctors, and with production problems hindering the company from meeting demand. Now there are competitors threatening its revenue stream, and the company might want to look into joining forces via combination therapies. Still, it has fallen so far that some see it, operating with new management, as a possible bargain.

Human Genome Sciences (NAS: HGSI) fell 49% over the past year, but that includes an 80% pop in April as the company faces a hostile bid from GlaxoSmithKline. One big attraction with HGS is its lupus drug, Benlysta, which some expect will eventually be a billion-dollar blockbuster, though so far its sales have been growing more slowly than many had hoped.

Sequenom (NAS: SQNM) shares slumped 55%, as the maker of molecular and genetic diagnostic tests has signed up insurers to cover its offerings, but also lost one, in Coventry Health Care. One of the company's tests checks for Down syndrome in a non-invasive manner. Future tests might address conditions such as macular degeneration.

The big picture
Demand for biotechnology 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.

If you're looking for investments with huge potential, check out our special free report: "Discover the Next Rule-Breaking Multibagger." It profiles a promising stock in the health-care arena.

At the time thisarticle was published Longtime Fool contributor Selena Maranjian, whom you can follow on Twitter, holds no position in any company mentioned. Click here to see her holdings and a short bio. The Motley Fool owns shares of Dendreon. Motley Fool newsletter services have recommended buying shares of Coventry Health Care. The Motley Fool has a disclosure policy.We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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