Single stock investing in biotech is both risky and difficult – full of surprises at 6am (when companies start putting out press releases) or 4pm (when markets close).
This is why I recommend investing in XBI, a biotech ETF, for those who want to participate in the upside of innovation in biotech, but do want to have single stock exposure – a negative event could bring down stock price by as much as -90%.
When you look up XBI, you will see that its formal name is SPDR S&P Biotech ETFs. Below is from early 2019, but you get the idea of how the weighting is done at ETF level – it is not driven by market capitalization – it tracks modified equal weighted index to diversify positioning risk.
Most of the companies that are in XBI tend to be below $10bn in market capitalization. If single stock research is difficult (lack of industry knowledge, lack of time, just too lazy, or all of the above), XBI could be a great choice for those who believe that:
1) the recent drawdown in the biotech sector is too severe and want to participate in the mean reversion, or
2) there is need to have some level of exposure to biotechnology across your stock / wealth portfolio. Note that biotech exposure and healthcare exposure are completely different things!
XBI certainly has been trading like a dog in October 2020 –
I am optimistic and bullish on the biotechnology sector. Rapid innovation has made to secular tailwind for the sector. With genomics and better technology, we have better understanding of the disease pathology (what causes the disease) and articulate design of molecules/therapeutics.
Identifying strong link between disease and therapeutics and finding the right patient population raised the probability of success and lowered cost of development (you don’t need as many patients for trials anymore as study populations are more enriched).
Long Live Biotechnology!
