Biotech stocks face volatility but boast long-term potential.
A highly volatile subset of the health care sector is the biotechnology industry. These companies are involved in the development of pharmaceuticals, treatment processes, genomics, food production and even biofuels. The effects of the COVID-19 pandemic gave the industry significant tail winds, with numerous firms profiting off vaccine development. While some biotech companies like Pfizer Inc. (ticker: PFE) and Novartis AG (NVS) are established blue-chip stocks, many in the industry tend to be mid- or small-cap stocks. Investing in these companies is fraught with risk. Biotech companies often incur high operating losses developing drugs that might never receive regulatory approval or go to market, giving the industry a boom-or-bust reputation. A safer way to invest in this high-growth industry while lowering your risk is to buy an exchange-traded fund, or ETF, that holds the stocks of various biotech companies. Here is a list of seven top biotech ETFs to buy in 2022.
Ark Genomics Revolution ETF (ARKG)
Cathie Wood’s flagship ARKG ETF suffered dearly in recent years, falling more than 30% in 2021 and 54% so far in 2022, as of May 11. This came on the heels of a standout year in 2020, when the ETF was a top performer with a total return of more than 180%. With interest rates expected to rise further, ARKG’s speculative holdings may face more volatility. The fund consists of 40 to 60 mostly North American companies involved in the targeted therapeutics, bioinformatics, molecular diagnostic, stem cell and agricultural biology industries. With a median market cap of $2 billion, ARKG is skewed more toward mid- and small-cap stocks. ARKG is actively managed, with Wood charging a hefty expense ratio of 0.75% for her management style. Still, investors bottom fishing and looking for a rebound play in biotech could buy ARKG as a speculative bet.
Direxion Daily S&P Biotech Bull 3x Shares ETF (LABU)
LABU is a leveraged ETF that aims to provide three times the daily returns of the S&P Biotechnology Select Industry Index. The key word to note here is “daily.” Over long periods of time, LABU may not produce exactly three times the total returns of its underlying holdings due to volatility decay and compounding risk. This effect is prevalent among all leveraged ETFs, but more pronounced for LABU given the volatility of its underlying holdings, which are mostly mid- and small-cap biotech stocks. This makes LABU more suitable for bullish short-term swings or day traders looking to speculate in the biotech industry. Adding to LABU’s unsuitability as a long-term buy-and-hold is its high expense ratio of 0.96%. Still, if you have a strong short-term thesis for the performance of the biotech industry, LABU could be a good buy.
Direxion Daily S&P Biotech Bear 3x Shares ETF (LABD)
As mentioned earlier, biotech companies are highly volatile. For every stock that obtains regulatory approval and goes to market with a revolutionary new product, there are a dozen others that go bankrupt and get delisted. If you’re feeling bearish toward the industry — especially in the face of rising interest rates and an equity bear market — LABD might be a good short-term trade. This ETF is the opposite of LABU, aiming to provide three times the daily inverse returns of the S&P Biotechnology Select Industry Index. This makes LABD more suitable for bearish short-term swings or day traders looking to hedge against a decline in the biotech sector. Like LABU, LABD has a high expense ratio of 1.01% and is also unsuitable for holding long term due to compounding risk and volatility decay.
iShares Biotechnology ETF (IBB)
Investors looking for a less risky, more diversified long-term investment should consider IBB instead, which tracks the performance of an index made up of 372 U.S. biotech stocks. Surprisingly, IBB is less volatile than the market, with a three-year beta of just 0.72 compared with the S&P 500’s beta of 1.00. This is thanks to its larger holdings of stable, established pharmaceutical companies such as Amgen Inc. (AMGN), Gilead Sciences Inc. (GILD), Regeneron Pharmaceuticals Inc. (REGN) and Moderna Inc. (MRNA). The ETF has done well over the years, generating a more than 150% return over the past 10 years. Being passively managed, IBB is also cheaper than the previous ETFs, with an expense ratio of 0.45%.
SPDR S&P Biotech ETF (XBI)
Another passive indexing approach to investing in biotech stocks is to buy XBI, which tracks the biotech subindustry segment of the S&P Total Market Index. With 156 holdings possessing a weighted average market cap of $10 billion, XBI provides good exposure to a diversified portfolio of large-, mid- and small-cap biotech stocks. XBI is down 9.7% over the past five years, as of May 11, and has fallen 44% year to date. With the recent dip, bullish investors can consider buying XBI in case the biotech sector stages a recovery once the current market volatility subsides. Compared to IBB, XBB is also cheaper, with an expense ratio of 0.35%.
VanEck BioTech ETF (BBH)
Investors seeking more concentrated biotech exposure but stopping short of investing in individual stocks can buy BBH as a good middle ground. This ETF tracks the MVIS US Listed Biotech 25 Index, which consists of 25 companies involved in the development, production, marketing and sale of drugs, genetic analysis and diagnostic equipment. BBH is strongly skewed toward large-cap stocks, favoring those with high market caps and trading volume. This gives the ETF better liquidity and lower volatility compared to more speculative small-cap biotech stocks. The top five holdings currently include Amgen, Moderna, Gilead Sciences, Regeneron Pharmaceuticals and Vertex Pharmaceuticals Inc. (VRTX). BBH also provides some exposure to non-U.S.-listed biotech companies at around 13% of the ETF’s holdings. Like XBI, holding BBH will cost an expense ratio of 0.35%.
Invesco Dynamic Biotechnology & Genome ETF (PBE)
PBE tracks the Dynamic Biotech & Genome Intellidex Index, which uses a slightly more active management approach compared to traditional passive indexing. For inclusion in PBE, biotech stocks are screened for price momentum, earnings momentum, quality, management action and value. Successful candidates join PBE’s holdings of 30 U.S. biotechnology and genome companies, which include Vertex Pharmaceuticals, Incyte Corp. (INCY), Regeneron Pharmaceuticals, Amgen and Catalent Inc. (CTLT). With a weighted average market cap of $25 billion, PBE’s holdings skew more toward large-cap stocks, with 10.5% and 11.7% of the ETF categorized as large-cap value and blend, respectively. On average, PBE’s holdings exhibit a price-to-book ratio of 3.71, and a price-to-earnings ratio of 25.59. Holding this ETF will cost an expense ratio of 0.59%.
Here are the seven best biotech ETFs to buy:
— Ark Genomics Revolution ETF (ARKG)
— Direxion Daily S&P Biotech Bull 3x Shares ETF (LABU)
— irexion Daily S&P Biotech Bear 3x Shares ETF (LABD)
— iShares Biotechnology ETF (IBB)
— SPDR S&P Biotech ETF (XBI)
— VanEck BioTech ETF (BBH)
— Invesco Dynamic Biotechnology & Genome ETF (PBE)
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7 Best Biotech ETFs to Buy originally appeared on usnews.com
Update 05/12/22: This story was published at an earlier date and has been updated with new information.
