Biotech funds let you invest in companies developing next-generation treatments.
Many investors are drawn to the health care sector because of its unrivaled stability and impressive growth potential. Health care spending is one expense that households will not cut back on even when times are tough, and the sector is all but guaranteed to keep growing, thanks to pricey next-generation cures. If you want to focus on the future of health care, biotech stocks offer an aggressive but potentially high-reward way to do so. These stocks can sometimes be small and relatively unknown, but when they develop a successful new drug, they can power higher in a hurry. If picking individual biotech stocks sounds risky or difficult, then consider one of these seven biotech exchange-traded funds as a diversified alternative to invest in this trend.
iShares Biotechnology ETF (IBB)
This iShares fund is the largest biotech ETF by assets under management, with about $11 billion and trading volume that regularly tops 3 million shares daily. However, it’s worth noting that despite roughly 270 positions, more than 18% are in three of the most prominent stocks in the sector: Moderna Inc. (MRNA), Amgen Inc. (AMGN) and Gilead Sciences Inc. (GILD). Still, these are popular biotech stocks on the top of many investors’ lists anyhow, so that focus on these larger and more established names may not be too much of a drawback.
ARK Genomic Revolution ETF (ARKG)
More focused in its mission but still impressive in size, ARKG is a roughly $10 billion ETF that purports to focus on genomic-related companies including those developing gene therapies, performing molecular diagnostics or experimenting with stem cell technology. It aims to hold much fewer stocks as a result, typically 30 to 50 positions. The downside, however, is that if that narrow group of holdings doesn’t do well, this ETF may lag. So far in 2021, the ARKG fund is actually in the red, compared with a 17% gain for the S&P 500 and a 7% gain for the iShares Biotechnology ETF.
SPDR S&P Biotech ETF (XBI)
The third major alternative for biotech ETF investors is this “equal weight” fund that comprises about 200 total holdings but regularly rebalances to spread investor assets equally across each stock in the portfolio. With more than $7 billion in assets, it’s no small fry fund, either. The thing to remember, however, is that even a diversified list of holdings can still struggle. XBI is also in the red in 2021, thanks in part to some of the hotter and smaller names in the biotech sector cooling off after their initial coronavirus run. Still, if you want to invest in the long-term potential of this subsector of health care, XBI could provide a simple way to do so without researching under-the-radar development-stage biotechs.
First Trust NYSE Arca Biotechnology Index Fund (FBT)
The $2 billion First Trust biotech ETF is another focused fund, with just 30 total stocks. Top positions right now include big dogs like Moderna but also midsize names like the $70 billion BioNTech SE (BNTX) and comparatively small picks like the $11 billion Qiagen NV (QGEN). This curated list has fared a bit better in 2021 than some of the other short-list biotech ETFs in this article, but keep in mind that this structure shares the same potential risk, and past performance is no guarantee of future returns in this sometimes volatile sector.
VanEck Vectors Biotech ETF (BBH)
A bit smaller than the biotech ETFs we’ve seen so far but still substantial, BBH commands $550 million in assets under management. But like some of the other more focused funds, the thing you should pay attention to is the concentration of holdings: a mere 24 total positions as of July 2021, with more than 20% in the top three alone. Of course, where it differs is that this focus has actually paid off for BBH investors, with about 20% gains in 2021 while other biotech ETFs on this list are underwater. Sometimes a smaller fund with a small list of holdings can prove a wise investment.
iShares Genomics Immunology and Healthcare ETF (IDNA)
Though another iShares fund is the largest among biotech ETFs, this more focused immunology and genomics fund is still substantial at more than $300 million in assets under management. Stocks differ from the typical list of major players, including both Big Pharma mainstays like Merck & Co. Inc. (MRK) that have major immunotherapy businesses and smaller development-stage drugmakers like the $8 billion Fate Therapeutics Inc. (FATE). Shares are up about 6% year to date, outperforming a few of the biotech ETFs that take a more general approach, which could speak well for following this subset of biotech stocks instead of the whole field.
Direxion Daily S&P Biotech Bull 3X ETF (LABU)
The final biotech ETF on this list is one of the larger ones when it comes to assets, with more than $700 million in funds. However, it’s by far the biggest risk of any of these because of a unique structure that aims to deliver three times the daily returns of the underlying investments. Obviously, this is great when things go well, but if things go south, you can wind up with triple the losses. And as you may have guessed by some of the losers on this list, that has indeed happened in 2021, with LABU posting a 46% decline. Still, if you are very bullish on the sector and don’t mind the risk involved, it’s hard to argue that there’s a more aggressive way to place your money on the future of biotech. Just make sure you’re aware of the risks of significant declines before pulling the trigger.
7 Best Biotech ETFs to Buy
— iShares Biotechnology ETF (IBB)
— ARK Genomic Revolution ETF (ARKG)
— SPDR S&P Biotech ETF (XBI)
— First Trust NYSE Arca Biotechnology Index Fund (FBT)
— VanEck Vectors Biotech ETF (BBH)
— iShares Genomics Immunology and Healthcare ETF (IDNA)
— Direxion Daily S&P Biotech Bull 3X ETF (LABU)
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Update 07/28/21: This story was published at an earlier date and has been updated with new information.