AMEX Biotech Index
What it is:
How it works/Example:
The AMEX Biotech Index is comprised of 17 firms that are chosen to represent the Biotech sector. The index is relatively unusual in that it is equal-dollar weighted. This means that each stock receives the same weighting in the index. The index is rebalanced four times per year to maintain continuity and to keep any stock from dominating the index's value.
Why it matters:
The Biotech Index is an excellent choice for investors who wish to track the performance of the Biotech sector apart from the broad market. Although it has been extremely volatile, the Biotech sector has historically outperformed the overall market, so there is a large amount of interest in this area.
Many investors do not like the fact that all of the Biotech Index's component stocks are equally weighted. This may distort the index's overall returns because a handful of small companies could have a larger impact on performance than some of the industry's largest players, such as Amgen and Genentech. The index is also somewhat narrowly focused because it only holds 17 firms out of the hundreds of companies that operate in this sector.