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Biotech ETFs are breaking out—here are 3 ways to play the space

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Biotech ETFs are breaking out, here's what to watch

Biotech stocks are in breakout mode.

The SPDR S&P Biotech ETF and the iShares Nasdaq Biotechnology ETF, two popular exchange-traded funds tracking the biotechnology space, popped on Monday after Pfizer, the largest drugmaker in the U.S., said it would buy Array BioPharma for over $10 billion.

The SPDR ETF, ticker XBI, had rallied almost 5% by Monday afternoon, while the iShares fund, ticker IBB, rose by nearly 3%.

And, "if you're looking for large-cap exposure or mega-cap exposure in this space, IBB is clearly the one that stands out," Chris Hempstead, Deutsche Bank's head of ETF sales, told CNBC's "ETF Edge" on Monday.

His reasoning? The IBB weighs its holdings by their market caps, meaning the more valuable names account for bigger chunks of the portfolio. That structure can provide protection in times of volatility, as larger companies can hold up better than their smaller, more focused counterparts.

"XBI is equal weighted, so you're going to get closer to that mid-cap sphere of the companies that are in there," he said, admitting that XBI "gives you a little bit more of the upside of a growth company than the bigger companies in the IBB."

But there's another part of the space that piqued Hempstead's interest on Monday: the ALPS Medical Breakthroughs ETF, a fund tracking companies with cancer and immunotherapy treatments that are in the final stages of clinical trials.

The top holding in that fund, ticker SBIO, is Array BioPharma, which accounts for roughly 6% of that portfolio, Hempstead said. SBIO had surged nearly 8% by Monday afternoon following Pfizer's deal announcement.

"Thirty-four percent of the allocation in this fund is on cancer drug companies [and] immunotherapy. This is a hot spot right now," Hempstead said. "This is the kind of thing that, if people open up the hood of the ETF and they look at what's in it, they can gear their investment to what they really want."

And, with 2,300 ETFs and counting available to investors, buyers doing their homework is now imperative, he said.

"They hear people talk about cancer drugs, they hear people talk about oncology advancements, and they say, 'I want to invest in that,'" Hempstead said. "They look under the hood at XBI, IBB and names like SBIO and they'll find what they're looking for."

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