Biotech ETFs offer diversified, low-cost exposure.
If anyone didn’t already understand the dynamic potential of the health care sector, the pandemic has proven in real time how innovative the next generation of pharmaceutical companies are — and how vital they are to public health. So-called “biotechnology” companies look beyond chemical compounds or surgical tools to harness the power of biological systems including stem cells or RNA to create innovative vaccines, cancer therapies or cures for immune system disorders. Of course, sometimes you need a doctorate in chemistry to understand just how these biotech stocks operate. But thankfully, there are a few well-established biotech exchange-traded funds that allow small investors to play this dynamic sector in a diversified, low-cost way without having to do any medical research.
iShares Biotechnology ETF (ticker: IBB)
As the leading biotech ETF by assets with more than $11 billion under management, IBB is the most popular and liquid way to play this high-growth corner of the health care sector. Top holdings among its 270 positions include Moderna Inc. (MRNA), Amgen Inc. (AMGN) and Gilead Sciences Inc. (GILD). These aren’t exactly small upstarts, however, as the trio is collectively worth nearly $400 billion in market value — and at 24% of the entire IBB portfolio, they drive most of the performance here. Still, with a deep list of positions, this iShares fund remains a diversified and cost-effective way to play this corner of Wall Street.
ARK Genomic Revolution ETF (ARKG)
A much more focused offering in some ways is ARKG, which targets 50 or fewer holdings. The top single position is only 7% of the portfolio. But more importantly, that pick is Teladoc Health Inc. (TDOC) — a $25 billion remote health care stock that isn’t your traditional biotech name. You will find more conventional companies such as Pacific Biosciences of California Inc. (PACB) or Vertex Pharmaceuticals Inc. (VRTX) near the top of the list. But this unique approach to the sector is worth noting if you’re interested in biotech ETFs. Of course, it’s hard to argue with the performance of this $8 billion biotech ETF as ARKG is up 30% in the last 12 months.
SPDR S&P Biotech ETF (XBI)
The third major biotechnology stock ETF worth a look is this fund from State Street Global Advisors. This is perhaps the most-diversified option out there, as its “equal-weight” approach means the portfolio is regularly rebalanced to ensure none of the roughly 200 holdings grow to wield too much influence over the performance of this fund. Specifically, right now there’s not a single holding representing more than 1.3% of the portfolio. XBI isn’t a minor player either with more than $7 billion in assets under management. If you’re serious about diversification, then you may want to give this biotech ETF a look.
First Trust NYSE Arca Biotechnology ETF (FBT)
The best of both worlds for those who want a shortlist of high-octane biotechs but also a reasonable amount of diversification could be this First Trust fund that only has a total of 30 positions under its belt. That said, less than 14% of total assets are in the top three positions, so you’re getting a pretty equal stake in all of these companies. At present, those top stocks including biotech giant Moderna but also $5 billion Alkermes PLC (ALKS) — proving that the nearly $2 billion FBT is willing to look anywhere to create its focused list of biotech stocks.
VanEck Biotech ETF (BBH)
BBH is slightly smaller than the biotech ETFs we’ve seen so far but still quite established with more than $600 million in assets. Its portfolio is also the smallest so far with a mere 24 total positions. Naturally, that means you’re betting big on just a few stocks, but even within that portfolio, the makeup is top heavy with 18% in the top two stocks alone — Moderna and Amgen. This strategy can pay off when things go well, and BBH has beat the S&P 500 with 35% returns in the last year. When things go poorly, however, BBH investors can lose quickly, so it remains a biotech ETF to watch with caution.
iShares Genomics Immunology and Healthcare ETF (IDNA)
Much smaller than the leading biotech ETF from iShares, this more-focused fund has about 50 total components and roughly $400 million under management. Its stated mission is to invest primarily in “innovation in genomics, immunology and bioengineering” — areas that are particularly dynamic and that many investors believe hold the most long-term promise in the health care sector. That old favorite Moderna again makes an appearance as the fund’s biggest holding, but other names including Intellia Therapeutics Inc. (NTLA) and BioNTech SE (BNTX) are also top positions.
Direxion Daily S&P Biotech Bull 3X Shares ETF (LABU)
No discussion of fast-moving biotech ETFs would be complete without the fastest-moving fund of them all — this “leveraged” offering from Direxion aims to deliver 300% of the daily returns of the S&P Biotechnology Select Industry Index. That’s great news when times are good, like when this ETF nearly tripled from its late 2020 lows to a high that briefly crested $185 in February. The stock has plummeted back to the $60 range, however, so investors also have painful proof that LABU can deliver three times the losses if the market moves away from them. If you’re not afraid of the big risks and want to bet on biotech, LABU may have a limited role in your portfolio.
Biotech ETFs to buy now:
— iShares Biotechnology ETF (IBB)
— ARK Genomic Revolution ETF (ARKG)
— SPDR S&P Biotech ETF (XBI)
— First Trust NYSE Arca Biotechnology ETF (FBT)
— VanEck Biotech ETF (BBH)
— iShares Genomics Immunology and Healthcare ETF (IDNA)
— Direxion Daily S&P Biotech Bull 3X Shares ETF (LABU)
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