Whether or not it fits your political philosophy, the climate in Washington appears conducive for politicians to address health care reform. This could mean opportunities for astute investors in health-related stocks. Congress is attempting to craft legislation to lower health care costs and expand coverage. Whatever eventually makes it to President Obama’s desk will cost at least $1 trillion and probably much more. Yep, that’s trillion with a “T.”
Since taxpayers will be footing the bill for health care reform, it may be time to find a way to profit from this grandiose government expenditure. Think outside the realm of traditional pharmaceutical companies and health insurers. Those sectors are each facing headwinds that make stock picking difficult. In addition, big pharma companies like Merck (MRK) and Pfizer (PFE) are desperate to reload their empty pipelines in the face of increased competition from generic drug makers. Acquiring a smaller biotech firm is the easiest way for a pharma giant to find a potential new blockbuster drug.
The best way to play the government-sponsored health care boom is through biotech ETFs. We reviewed the complete list of biotech ETFson Monday. Today, we focus on the two that should be on everyone’s watch list.
As a trading vehicle, we like theiShares Nasdaq Biotechnology Trust (IBB),the most popular and liquid of the biotech ETFs with an average trading volume of nearly one million shares per day. Bid/ask spreads are typically well maintained, even though it holds 123 stocks. This ETF mirrors the performance of the Nasdaq Biotechnology Index and has been steadily advancing the past two months.
For longer-term investors, we like the S&P SPDR Biotech ETF (XBI), which holds 25 equally weighted stocks and tracks the S&P Biotechnology Select Index. XBI does a good job of mixing solid large cap names such as Amgen (AMGN) and Gilead Sciences (GILD) with riskier small cap fare. This ensures good diversification within the biotech space and gives you the opportunity to profit from the smaller players. Currently the bid/ask spreads are reasonable but wider than those of IBB, even before adjusting for its lower trading price. XBI has the potential to be a great trading vehicle one day, but for now, IBB holds that honor among biotech ETFs. XBI lagged the market dramatically since late February, making now a great opportunity to get on board without the risk of buying an overextended ETF.
With health care on the front burner in Washington, these biotechnology ETFs may finally be ready to pop after missing the recent market rally. They offer exciting profit potential on Washington’s next boondoggle, and their defensive characteristics may insulate investors if the market turns down again. To play health care reform defensively, go with IBB or XBI.