According to the Global Industry Classification Standard, or GICS, the health care sector is split into two main industry groups: health care equipment and services, and pharmaceuticals and biotechnology, commonly referred to as biotech.
The health care equipment and services group encompasses equipment and supplies, providers and services, and health care technology industries. Notable examples of each category include Medtronic PLC (ticker: MDT) for equipment and supplies, UnitedHealth Group Inc. (UNH) for providers and services, and and Intuitive Surgical Inc. (ISRG) for health care technology.
The pharmaceuticals and biotechnology group include the biotech, life science tools and services, and pharmaceutical industries. Notable examples here are Amgen Inc. (AMGN) for biotech, Illumina Inc. (ILMN) for life science tools and services, and Pfizer Inc. (PFE) for pharmaceuticals.
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The diversity in products, services and end customers across these groups leads to varying levels of risk and return, economic sensitivity, and industry-specific challenges. Perhaps no industry exemplifies this dynamic more than biotech, which is characterized by its high-risk, high-reward nature, primarily due to the lengthy and uncertain drug development process.
“Given biotechnology firms have limited revenues, if any, from commercialized products, a lot of their market performance is based on the development of investigational treatments,” says Arelis Agosto, senior health care analyst at Global X ETFs. “From there, only an estimated 9.6% of drugs that enter phase 1 clinical testing are expected to reach the market, though biotechnology treatments that are approved can have remarkable returns.”
However, investing in a biotech ETF offers a way to mitigate many of the risks associated with this volatile sector. By pooling investments in a wide range of companies, biotech ETFs allow investors to partake in the sector’s overall long-term growth potential while avoiding the pitfalls of company-specific risks.
“There is a high risk of failure for biotech companies, as innovations must undergo years of clinical trials and a failure can destroy the equity in a company,” says Adam Grossman, global equity chief investment officer at RiverFront Investment Group. “Therefore, returns in the space are widely dispersed, so picking individual biotech companies that will win is very difficult and risky.”
Here are seven of the best biotech ETFs to buy in 2024:
| ETF | Expense ratio |
| VanEck Biotech ETF (BBH) | 0.35% |
| iShares Biotechnology ETF (IBB) | 0.45% |
| Invesco Nasdaq Biotechnology ETF (IBBQ) | 0.19% |
| SPDR S&P Biotech ETF (XBI) | 0.35% |
| Global X Genomics & Biotechnology ETF (GNOM) | 0.50% |
| WisdomTree BioRevolution Fund (WDNA) | 0.45% |
| ARK Genomic Revolution ETF (ARKG) | 0.75% |
VanEck Biotech ETF (BBH)
“Unless an investor has a really high risk tolerance and a strong belief that they have an edge in deciding what drugs will make it through trials, we would recommend an investor use the diversification inherent in an ETF to invest in the biotech space,” Grossman says. A great example is BBH, which provides investors with exposure to the MVIS U.S. Listed Biotech 25 Index for a 0.35% expense ratio.
BBH’s benchmark is designed to track a market-cap-weighted portfolio of the 25 largest U.S. listed domestic and foreign biotech firms. Notable names in its portfolio include Amgen, Vertex Pharmaceuticals Inc. (VRTX), Gilead Sciences Inc. (GILD), Regeneron Pharmaceuticals Inc. (REGN) and Moderna Inc. (MRNA). Since its inception in December 2011, BBH has returned an annualized 14%.
iShares Biotechnology ETF (IBB)
Investors looking for greater diversification and liquidity can opt for IBB, which is one of the largest biotech ETFs, with over $7.7 billion in assets under management, or AUM. This ETF tracks the NYSE Biotechnology Index, holding a total of 223 market-cap-weighted U.S.-listed biotech firms. It is easy to buy and sell, with a low 30-day median bid-ask spread of just 0.01%.
The market-cap-weighted methodology used by IBB’s index ensures that larger biotech companies like Vertex, Regeneron, Amgen and Gilead occupy a greater weight in its portfolio. However, if a small-cap upstart does eventually grow to challenge these established leaders, IBB’s index will naturally shift to accommodate that, allowing investors to benefit from it. The ETF charges 0.45%.
Invesco Nasdaq Biotechnology ETF (IBBQ)
“Improved merger and acquisition activity, reasonable valuations, and the potential for high-value artificial-intelligence-enabled biotech platforms could serve as a catalyst for biotech stocks in the near-to-medium term,” says Rene Reyna, head of thematic and specialty product strategy at Invesco. For biotech exposure, Invesco offers IBBQ at a lower 0.19% expense ratio compared to BBH and IBB.
“IBBQ tracks the Nasdaq Biotechnology Index, a nearly three-decades-old index methodology that remains straightforward, transparent and befitting of a true industry benchmark,” Reyna says. The ETF currently has 222 holdings, with Vertex, Regeneron, Amgen, Gilead and Moderna again appearing in its top holdings due to its market-cap-weighted index methodology.
SPDR S&P Biotech ETF (XBI)
The market-cap-weighted indexes employed by BBH, IBB and IBBQ result in a higher concentration of large-cap biotech stocks. While these firms can offer greater stability, they may not appeal to risk-inclined biotech investors looking for exposure to more volatile, up-and-coming companies. For greater exposure to small- and mid-cap biotech stocks, investors can buy XBI.
“If I were to invest specifically in this space using a liquid instrument like an ETF, I would prefer XBI,” says Michael Wagner, co-founder and chief operating officer of Omnia Family Wealth. “It uses a modified equal-weight approach that I think makes sense in this space.” This results in the ETF’s 120 holdings each being assigned roughly the same weight. XBI charges a 0.35% expense ratio.
Global X Genomics & Biotechnology ETF (GNOM)
“Instead of being beholden to the binary nature of biotech events, investing in a broader pool of biotech firms helps hedge risk for negative events while still having significant exposure to long-term structural shifts in the health care industry,” Agosto says. These tailwinds include an aging population, advancements in genetic and cellular therapies, and increasing global health care expenditures.
“GNOM specifically only includes firms that fall into one of our four key segments for genomics biotech, meaning at least 50% of each firm’s existing or expected revenue comes from either gene editing, genomic sequencing, genetic medicines and therapies, or computational genomics and genetic diagnostics,” Agosto says. The ETF charges a 0.5% expense ratio.
WisdomTree BioRevolution Fund (WDNA)
“WDNA can be used to complement core portfolios with innovative megatrends in the biotech space and satisfies demand for genetics and biotechnology investments with strong growth characteristics,” says Jeremy Schwartz, global chief investment officer at WisdomTree. This ETF tracks the proprietary WisdomTree BioRevolution Index, which currently has 91 holdings.
A hallmark of WDNA is greater international diversification. While 82% of the WDNA’s portfolio is still U.S.-based, the ETF also has allocations to biotech stocks from developed market countries like Denmark, Switzerland, Germany, the U.K., the Netherlands, Japan and Belgium. It also features a decent allocation to small- and mid-cap biotech stocks at 26% and 33%, respectively. WDNA charges 0.45%.
ARK Genomic Revolution ETF (ARKG)
All of the previous biotech ETFs are passively managed in that they replicate the composition of a benchmark index. In contrast, ARKG is actively managed and does not track an index. Instead, its fund manager Cathie Wood and her team of analysts picks and weights biotech and genomic firms based on their discretion and proprietary research. As a result, it is pricier, with a 0.75% expense ratio.
Being actively managed, this ETF has the potential to both outperform and underperform its index competitors. During 2019 and 2020, ARKG strongly outperformed, returning 43.8% and 180.5%, respectively. However, it came crashing down hard in 2021 and 2022, losing 3.9% and 53.9%, respectively. Thus, investors buying ARKG must be willing to accept high volatility and drawdowns.
[See: 7 Best ETFs to Buy Now.]
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7 Best Biotech ETFs to Buy Now originally appeared on usnews.com
Update 02/29/24: This story was previously published at an earlier date and has been updated with new information.
