Biotech funds hold companies developing next-gen treatments.
For obvious reasons, health care technology has been in focus in 2020 as the pandemic has caused significant changes in the way we live and work. And within health care, there is perhaps no subsector more exciting than biotechnology. That is the use of living systems and organisms in health applications. It may sound like something out of science fiction, but biotechnology can be used in a host of treatments. This includes applications such as the insulin taken by diabetics as well as dynamic cancer therapies that stimulate the body’s own immune system to fight off the disease. As you can imagine, the universe of biotechnology stocks is as vast as the potential treatments in this field, so a diversified exchange-traded fund may be very appealing to investors who want exposure to this sector. Here are seven biotech ETFs to consider.
iShares Nasdaq Biotechnology ETF (ticker: IBB)
The largest of the biotech stock ETFs on Wall Street, IBB is a $9 billion fund that regularly trades more than 3 million shares daily. Though an index fund, it’s not quite as diversified and low-cost as you might expect from other ETFs that share these labels; expenses are fairly significant at 0.46% annually, or $46 on every $10,000 invested, and the fact that IBB is benchmarked to the Nasdaq Biotechnology Index means it only has shares of stocks listed on that exchange — excluding everything on the well-established New York Stock Exchange. Still, you get a pretty deep bench of more than 200 names, so this very liquid biotech ETF is popular for good reason.
The SPDR S&P Biotech ETF (XBI)
In contrast to IBB, this SPDR fund is linked to the S&P Biotechnology Select Industry Index. That gives it an admittedly smaller list of total holdings at around 140 positions, but it samples from the most established picks on all U.S. exchanges, including the NYSE, to provide a more substantial list of holdings, such as $19 billion pharmaceutical company Immunomedics (IMMU). Some investors may think this leaves them out of the smallest biotechs, with the highest potential. But this focus on the top of the food chain does help smooth out some volatility in an already fast-moving sector. It’s also well-established in its own right with more than $5 billion in assets under management, and it offers a cheaper cost structure with an expense ratio of 0.35%.
ARK Genomic Revolution ETF (ARKG)
Though you may not be as familiar with ETF house ARK compared with brands like iShares, this asset management firm has made a name for itself with a short list of very tactical funds such as this “genomic revolution” offering. Specifically, ARKG is focused exclusively on stocks involved with genomics, like CRISPR Therapeutics (CRSP), spanning both gene therapies as well as stem cell research and even agricultural biologics. You may not have heard of many of its top holdings, such as Invitae Corp. (NVTA), which runs various DNA tests such as prenatal screening. But considering ARKG has more than $2 billion in assets, there is a clear interest in this subsector among Wall Street investors.
First Trust NYSE Arca Biotechnology Index Fund (FBT)
Another roughly $2 billion player in the world of biotech stocks, FBT has a slightly higher expense ratio than other funds on this list at 0.55%. The biggest difference between this First Trust fund and its peers is that it holds a mere 30 total positions, such as Cambridge, Massachusetts-based Biogen (BIIB), putting more eggs in fewer baskets. This admittedly carries more risk, and in 2020, the strategy has worked against FBT, as it has underperformed some of the other more diversified players on this list. However, the idea is that when this targeted fund does get a hit, it has the potential to knock it out of the park. For investors looking to play a swath of the sector but still tap into outsized gains, this is an interesting option.
VanEck Vectors Biotech ETF (BBH)
Believe it or not, BBH is an even more focused fund with just 25 total holdings. The difference between BBH and the limited list of FBT, however, is that this VanEck fund has much more weight in the giants of biotech. For instance, at present, Amgen (AMGN) and Gilead Sciences (GILD) have a collective market cap of more than $220 billion. The pair represents more than 20% of BBH’s entire portfolio. Again, there is a higher risk in this approach, but BBH’s approach has been spot on lately as evidenced by the roughly 12% gain for this ETF this year — significantly outperforming both the S&P 500 as well as most of its peer funds in this sector.
Invesco Dynamic Biotechnology & Genome ETF (PBE)
Though one of the smaller funds on this list at only about $200 million in total assets, PBE is one of the oldest biotech ETFs on Wall Street with an inception date back in 2005. It’s another one of the more focused biotech offerings, with a total list of just 30 holdings. As far as performance goes, 2020 simply hasn’t been PBE’s year, as it’s currently trading roughly flat for the year even as other biotech funds have moved higher. This is in part because of its “dynamic” approach that fuels turnover of 250% annually, meaning that over 12 months, the entire list of holdings is changed out 2.5 times. This strategy hasn’t paid off lately, but this is certainly a fund worth watching based on its rich history.
Principal Healthcare Innovators Index ETF (BTEC)
If you are less interested in a smaller list of holdings than simply a list of holdings that contains smaller stocks, BTEC is the biotech ETF for you. It’s geared toward finding smaller and more innovative companies that might get overlooked, with a focus on active investment in early-stage research and development. This includes telehealth company Teladoc Health (TDOC). The list of more than 200 holdings purposefully excludes the top 150 names in the space, which means giants like Amgen that can sometimes dominate market-cap-weighted health care funds are noticeably absent. Again, this can potentially increase your risk profile, but investors looking for the most dynamic biotech stocks may find this approach appealing.
Several biotech ETFs to consider:
— iShares Nasdaq Biotechnology ETF (IBB)
— The SPDR S&P Biotech ETF (XBI)
— ARK Genomic Revolution ETF (ARKG)
— First Trust NYSE Arca Biotechnology Index Fund (FBT)
— VanEck Vectors Biotech ETF (BBH)
— Invesco Dynamic Biotechnology & Genome ETF (PBE)
— Principal Healthcare Innovators Index ETF (BTEC)
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