Motley Fool: Biotech bundles are a good way to moderate your risk

The Motley Fool Take

Want to invest in an exciting and fast-growing sector? Consider biotechnology, where gobs of companies (such as Amgen, Moderna and Gilead Sciences) are developing innovative therapies, some of which will be blockbuster game-changers.

There are big downsides to investing in biotech stocks, though: Many are very risky, shares can be quite volatile and it’s hard to assess them if you don’t have an advanced degree in science. Fortunately, you can lower the risk level and volatility by investing in exchange-traded funds that focus on the biotech sector.

ETFs are similar to mutual funds in that they can own lots of stocks (and sometimes other assets), but like stocks, they trade on public exchanges. Like mutual funds, ETFs charge fees (often referred to as expense ratios) to cover their operating costs.

Here are some solid biotechnology-focused ETFs to consider: The iShares Biotechnology ETF, the SPDR S&P Biotech ETF, the ARK Genomic Revolution ETF, the First Trust NYSE Arca Biotechnology Index Fund and the VanEck Biotech ETF.

You can (and should) look up any ETFs that interest you, learning more about their fees, portfolios and track records, among other things. The Morningstar.com and ETFTrends.com sites are good places to start, along with each ETF’s own web page. You can learn more about ETFs (and mutual funds) in the “Investing Basics” nook at Fool.com.

Ask the Fool

From T.G. in Billings, Mont.: A stock I bought has fallen, and I see no explanation in the news. What’s up?

The Fool responds: Individual stocks, like the overall stock market, don’t move in a straight line. Over long periods, the stock market has always risen but via a jagged line. Individual stocks will also be volatile to some degree, though shares of successful companies rise over the long run and those of less successful businesses falter or fall.

Share prices will rise or fall from day to day due to company news (big profits!), economic news (a pandemic!), another reason or sometimes no reason at all. Stock prices essentially reflect what investors are willing to buy and sell them for at that moment — and investors’ sentiments can change quickly.

Long-term investors needn’t worry about short-term moves. Focus on how confident you are in a company’s prospects and what you think its stock is really worth. The prices that matter most are the price you bought at and the price you eventually sell at.

From P.L. in Lawrence, Kan.: How costly will health care be when I’m retired?

The Fool responds: The estimate rises every year. According to Fidelity Investments, an average 65-year-old couple retiring in 2021 will spend about $300,000 on health care in retirement — excluding costs such as long-term care, most dental expenses and over-the-counter drugs. Of course, many of us may end up spending far more or far less. Regardless, that shocking number is a good reminder to plan for significant health care costs in retirement. Beginning at age 65, Medicare is a big help, but even with it, you’ll likely still have out-of-pocket expenses.

The Fool’s School

The Federal Reserve Bank, which is a key influencer of interest rates, has signaled that rates may soon rise, in part to combat inflation. Here’s how higher rates might affect you — in ways good and bad.

For starters, higher rates mean you’ll pay more when you borrow money, such as for a mortgage or a car loan. Credit card interest rates will rise, too — and they’re already rather steep, with average rates charged by cards recently near 16% and many cards charging far more. It’s always smart to pay down debt, and it’s especially important now.

Note that even if mortgage interest rates double from where they are now — 2% to 3% is typical — they will be far from historically high levels. Still, rising rates will mean higher mortgage payments for home buyers, and they may force buyers to settle for less costly homes as well. Borrowers with adjustable-rate mortgages will likely see their rates hiked over time. Some homeowners may want to consider refinancing their home loans now to lock in current low rates.

Rising rates also mean that those who are saving money will enjoy more generous interest rates from their various bank accounts, certificates of deposit, money market accounts and bonds. The prices of existing bonds will likely take a hit because bond buyers will prefer to buy new bonds that carry higher interest rates.

Rising interest rates can put a damper on the stock market’s performance — in part because alternatives to stocks, such as bonds, will look more attractive as rates rise. Also, companies that borrow money by issuing bonds will have to pay more interest on those loans. (We’ve been in a very long period with ultralow interest rates, and the stock market has done very well for much of that time.)

When borrowing costs rise, that can slow overall economic growth as businesses (and consumers) may spend less, depressing corporate earnings. Certain kinds of businesses, though, such as financial companies, will get a tailwind from rising interest rates.

My Dumbest Investment

From G., online: My dumbest investment was buying 5,000 shares of stock in Apple at $23 per share and selling them at $26.

The Fool responds: Ouch — that’s a painful regret. We’re not sure when your buying and selling occurred, but due to stock splits that have taken place, if you’d hung on, you’d have many more shares — each recently priced near $176.

If your trading happened before the 4-for-1 split of August 2020, you’d have 20,000 shares, with a recent value of $3.5 million. If it happened before the 7-for-1 split in June 2014, you’d have seven times 20,000, or 140,000 shares — recently worth nearly $25 million. And if it happened before the 2-for-1 split in June 2000 and the 2-for-1 split of February 2005, you’d have 560,000 shares worth close to $99 million.

While that may feel like a very dumb investment move now, cut yourself some slack: No one could have known, at various times in the past, just how phenomenally well Apple would do. Still, this is a great example of the power of hanging on to shares of companies you believe in that are continuing to grow and perform well. Remember, too, that stock splits are not as exciting as they appear, because while they can suddenly multiply the number of shares you own, share prices are reduced proportionately. Splits are mainly math exercises.

Who am I?

I trace my roots back to 1940, when two brothers opened a barbecue joint in California. In 1948, they switched to selling 15-cent burgers and made their restaurant more efficient via their “Speedee Service System.” In 1954, a visiting salesman was impressed. By 1961, he had bought the rights to their name and system of operations. Today, based in Chicago, I’m a quick-serve powerhouse, with close to 40,000 locations around the world and a recent market value near $200 billion. At the end of 2020, I employed about 200,000 people, and another 2 million-plus worked for my franchises. Who am I?

Can’t remember last week’s question? Find it here.

Last week’s trivia answer: Campbell Soup Co.