While the broader market has made respectable gains in 2009, Biotech stocks have stayed on the sidelines.

XBI

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The SPDR S&P 500 (SPY) is up 21% on the year while the SPDR S&P Biotech ETF (XBI) is actually down over 5% in 2009.

The uncertainty created by the long debate over remaking the country’s health care industry has played a key role in the poor performance of the sector.  In particular, U.S law makers are considering a data exclusivity period of between five and seven years for Biotech firms that invent new drugs. According to Della Vedova, a European policymaker, this will make it nearly impossible for American biologic makers to be globally competitive.  Firms in the EU enjoy 10 years of exclusivity with the option of an additional year if a biologic shows particular promise.

That said, Biotech has always been a risky industry for investors while not necessarily providing returns appropriate for the risk.  A recent WSJ story quotes a Dealogic study that found that the average return on Biotech IPOs since the start of 2001 has been minus 18%.

Part of XBI’s performance can be explained by the fact that it is equal weighted meaning that the fund sells winners and buys losers on a regular basis to maintain a balanced portfolio.  An ETF with a market-cap weighted portfolio such as the Nasdaq Biotechnology Index Fund (IBB) is up 11.6% on the year, but still lags the overall market.

XBI top holdings include Human Genome SciencesDendreon and Vertex Pharmaceuticals.  The ETF carries an expense ratio of 0.35%.

IBB top holdings include AmgenGilead and Teva and the fund’s expense ratio is 0.48%.

For more ETF investing choices, see the ETF Directory for a complete list of Sector ETFs.