“World stock indexes have struggled to continue the rally that began in 2009. Investors have begun to question the validity of the rally. However, there are small pockets of strength through the first two months of 2010, and the one sector that may be poised for a big year is the biotech stocks. Through February 19th, the Dow Jones US Biotech Index is up 6.1% versus a loss of 0.5% for the S&P 500. Granted this is a short timeframe to base any type of long-term investment decision on, but the last few years also indicate the biotech sector is setting up to beat the benchmarks in 2010. As the S&P 500 gained over 23% in 2009, the Biotech Index was only able to manage a gain of 5%, making it one of the worst performing sectors in the US market. The yearly rotation of money can be traced back another year as the Biotech Index gained 3% in 2008 as the S&P 500 lost 38.5%. If the pattern continues, the biotech stocks should continue the early outperformance throughout the entire year,”  Matthew McCall Reports From Investopedia.

McCall continues to say, “With approximately 160 biotech stocks trading on the major US exchanges it comes down to the stock picking abilities of investors and advisors. I have been picking stocks for years and the most difficult sector to attempt to pick a stock that will beat the market without taking on unnecessary risk is the biotech sector. This is why investors should consider investing in a biotech ETF, which is a basket of biotech stocks. The instant diversification lowers the risk dramatically as the potential reward does not fall as much. In the end, the reward-to-risk ratio becomes more attractive for the average investor either does not have the research capabilities to pick an individual biotech stock or prefers less risk.”

“There are currently five biotech ETFs that trade in the US with the two most heavily traded being the SPDR S&P Biotech ETF (NYSE:XBI) and the iShares NASDAQ Biotech ETF (NASDAQ:IBB). Even though the two ETFs track biotech indexes, they have a very different mixture of stocks that make up the portfolio and the return reflects that difference. Since the beginning of 2007, XBI has gained 24% as IBB has only added 10% for its investors. The varying returns have to do with IBB’s heavy concentration of assets in their top five holdings; making up 35% of the ETF. XBI for example has less than 20% of their assets in the top five holdings. When it comes down to investing in the biotech sector, the route of a biotech ETF is the best route for the majority of investors. If you do decide to pick an individual biotech stock you must be aware of the potential risk and be willing to take a big loss if the investment does not work out. The key is recognizing and managing the risk of your portfolio,” McCall Reports.

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Here is a closer look at the two biotech ETFs:

The investment (XBI) seeks to replicate as closely as possible, before expenses, the performance of an index derived from the biotechnology segment of a U.S. total market composite index. The fund uses a passive management strategy designed to track the total return performance of the S&P Biotechnology Select Industry index. The Biotech index represents the biotechnology sub-industry portion of the S&P Total Market index. It is nondiversified.

TOP 10 HOLDINGS ( 41.09% OF TOTAL ASSETS)

Company Symbol % Assets Biogen Idec Inc (BIIB) 4.01 BioMarin Pharmaceutical Inc. (BMRN) 4 Human Genome Sciences, Inc. (HGSI) 3.97 Incyte Corporation (INCY) 4.14 Isis Pharmaceuticals, Inc. (ISIS) 4.06 Medivation, Inc. (MDVN) 3.99 Regeneron Pharmaceuticals, Inc. (REGN) 4.65 Seattle Genetics, Inc. (SGEN) 4.24 United Therapeutics Corporation (UTHR) 4.11 Vertex Pharmaceuticals Incorpor (VRTX) 3.92

The investment (IBB) seeks investment results that correspond generally to the price and yield performance of the Nasdaq Biotechnology index. The fund uses the process of representative sampling, holding securities that have a similar investment profile to its index. The fund normally invests at least 90% of assets in the securities of the index or in American Depository Receipts. The fund may hold up to 10% of assets in securities that are not included in the index. It is nondiversified.

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ETF BASIC NEWS, NASDAQ:IBB, NYSE:XBI