2014 is shaping up to be another strong year for the biotechnology industry and associated exchange-traded funds (ETFs). After declining nearly 20% from February to April, the NYSE Arca Biotechnology Index rebounded to new highs during the month of August, boosting year-to-date returns to 34.6% (through 8/31/14). As in years past, the industry's news flow contained a number of important announcements that significantly impacted near term returns for biotechnology stocks. While such stories have a tendency to frame investors' conceptions of biotechnology ETFs in terms of short-term, tactical trading opportunities, a compelling case can also be made for longer-term, strategic allocations to the biotechnology industry.
In many respects, biotechnology is unlike other industries. To a large extent, future earnings for these companies depend on innovation that pushes the boundaries of scientific understanding. On the one hand, tremendous resources can be expended on ventures that ultimately provide little or no payoff; on the other, scientific breakthroughs may create blockbuster revenue streams. Moreover, circumstances that are largely beyond the control of biotechnology companies, such as decisions made by regulators, can make or break a project.
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