The biotech sector has a reputation for making traders millions in a split second, but for most of the thousands of traders I have met and taught over the years they seem to be on the other end of the trade. Just do a quick search through message boards or forums online and take a look at all the many frustrations traders air about the space.
There is no doubt about the volatility of the biotech space and its volatility is warranted. The reason is that many of these companies are small with little or no sales. This is because they are developing new drugs or medications for diseases. The hopes are that they develop something that can change the world of course but there is one big road block standing in their way. The Food and Drug Administration.
The FDA has the final say whether a drug can go to market or not. After a long process of drug trials and phases the FDA decides if potential medications can make it to the public. It is precisely because of this that many companies hit it big or fail at the very moment the FDA makes their final decision. It can make a stock worth a lot or it can make it worthless all within a few minutes.
It is for this reason that many would avoid the space (myself included), but I would trade the ETF for the biotech stocks and quite frequently do. The Symbol is the iShares Nasdaq Biotechnology (NASDAQ: IBB). This ETF helps to diversify the exposure to individual names and more importantly it is heavily weighted to the bigger, more stable biotech stocks.
Amgen (NASDAQ: AMG) makes up 9% of the ETF, and Celgene Corp (NASDAQ: CELG) accounts for another 7%. These are names that participate in the space but are quite a bit less volatile. The lesser known, more dangerous names are all held at a fraction of a percent of the ETF. For this reason it is still an ETF that can move quite a bit but wont see many moves that could potentially wipe out your account.