An exchange traded fund indexed to biotechnology stocks has pulled back about 10% from its all-time reached last month as the sector cools after leading the market higher through much of 2012.

Biotech ETFs have been successful in 2012, with some funds returning more than 30% year to date.

However, SPDR S&P Biotech ETF (XBI) is down 9.5% from the record high set in July.

Given the jarring pace of change, single-product liability, regulatory uncertainties, and intellectual property rights, picking biotech-sector stocksis a high-risk/high-reward proposition. As such, we think investing in the industry via an exchange-traded fund makes a lot of sense; its an extremely low-cost way to gain exposure to the industry in one trade, Robert Goldsborough wrote for Morningstar. [Biotech ETFs for an M&A Boom]

The biotech industry has been susceptible to the patent cliff that began expiring big pharmaceutical companies patents on major drugs. Health care reform has also been an ongoing issue, and industry tax is another weight. Come 2014, Medicare should be covering more people, which should boost volumes and the drug industry. [Follow the Breakthrough Drug Makers with Biotech ETFs]

The biotechnology industry has benefitted from the merger and acquisition activity that has been rapidly taking place within the sector. Many speculate there is more activity to come as Big Pharma looks for cash-hungry biotech companies, reports Goldsborough. [Biotech ETF in Stealth Bull Market]

ETFs are one of the best ways to gain exposure to this volatile industry. The biotech companies are still relatively new, making investment in a single company ultra risky. By investing in a basket of bioetch companies, the risk is mitigated and the chances of investing in a successful company is greater. This illustrates the need to look at the underlying holdings in such ETFs.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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Biotech ETFs Cool After Strong Run