The cyclical, high-risk, high-reward nature of the biotech industry is on full display in 2024. This industry is centered on using living organisms and bioprocesses for innovative drug development, genetic research and advanced medical diagnostics.
The current rut can be seen with the hiring patterns of major biotech companies or, rather, the lack thereof. Most firms are actually contracting, following 2023’s pattern of downsizing and restructuring. Companies like Ginkgo Bioworks Holdings Inc. (ticker: DNA), Cara Therapeutics Inc. (CARA), Agilent Technologies Inc. (A) and more have laid off employees throughout June 2024.
Why is this happening? Biotech companies need to preserve their capital for research and development (R&D) during slow periods by minimizing overhead. Their fortunes depend on successful drug development, which requires allocating all possible resources to R&D. Cost savings become crucial when new drug approvals or breakthroughs are not immediately forthcoming and the cost of capital is high.
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“Biotech has remained challenged this year, especially with expectations for rate cuts continually pushed back,” says Rene Reyna, head of thematic and specialty product strategy at Invesco. “However, valuations remain compelling and artificial-intelligence-enabled drug development continues to act as a potential positive catalyst in the near-to-medium term.”
While it’s a good bet that over the long term, the industry as a whole will develop and commercialize newer and more effective treatments, many companies will likely fail along the way. This is why prospective biotech investors should consider buying the entire industry for growth rather than picking individual stocks, using a biotech exchange-traded fund (ETF).
“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.”
Here are seven of the best biotech ETFs to buy today:
| 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% |
| Direxion Daily S&P Biotech Bull 3x Shares (LABU) | 0.96% |
VanEck Biotech ETF (BBH)
“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. “Therefore, returns in the space are widely dispersed, so picking individual biotech companies that will win is very difficult and risky.”
The diversification afforded by a biotech ETF like BBH, which tracks the MVIS U.S. Listed Biotech 25 Index, largely mitigates this risk. Despite the high volatility in this industry, BBH has returned an annualized 13.5% since its inception in December 2011. The ETF’s benchmark favors the largest and most liquid U.S. biotech firms, which lowers risk significantly. BBH charges a 0.35% expense ratio.
iShares Biotechnology ETF (IBB)
“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 IBB, which tracks 215 holdings represented by the NYSE Biotechnology Index for a 0.45% expense ratio.
IBB’s market-cap-weighted index methodology favors the largest biotech firms. The ETF’s top holdings include Amgen Inc. (AMGN), Vertex Pharmaceuticals Inc. (VRTX), Regeneron Pharmaceuticals Inc. (REGN), Gilead Sciences Inc. (GILD) and Moderna Inc. (MRNA), which played a large role in creating and commercializing the COVID-19 vaccine. It is also very tax-efficient, with a low 0.3% 30-day SEC yield.
Invesco Nasdaq Biotechnology ETF (IBBQ)
The Nasdaq stock exchange is known for hosting some of the largest and most notable technology companies, but it also has a fairly substantial roster of biotech stocks. To access these, investors can buy IBBQ. “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.
IBBQ’s portfolio currently includes 215 companies with top holdings nearly identical to IBB. This makes the duo a great tax-loss harvesting pair given that they have similar compositions but track different indexes. However, IBBQ outshines IBB when it comes to fees. With a 0.19% expense ratio, it is significantly cheaper than the latter, making it a great option for cost-conscious, long-term investors.
SPDR S&P Biotech ETF (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.” XBI achieves this by tracking the S&P Biotechnology Select Industry Index, which assigns equal allocations to its 136 holdings.
Thus, compared to BBH, IBB or IBBQ, XBI has a much higher allocation toward small- and mid-cap biotech stocks, with less of an emphasis on the large caps. This makes the ETF more volatile but could result in higher growth over time for risk-tolerant investors. It charges a 0.35% expense ratio, the same as BBH, and also features an options chain for active biotech traders looking to speculate or hedge.
[See: 7 Top-Performing Equal-Weight ETFs to Buy]
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. With this approach, investors can worry less about clinical trial successes, and focus more on long-term demand for biotech treatments.
Global X’s thematic offering in this space is GNOM, at a 0.5% expense ratio. “GNOM specifically only includes firms that fall into one of 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.
WisdomTree BioRevolution Fund (WDNA)
Best known for its lineup of fundamentally weighted dividend funds, WisdomTree also offers WDNA as a thematic biotech ETF. “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.
The proprietary WisdomTree BioRevolution Index tracked by WDNA is less large-cap-heavy compared to IBB, BBH and IBBQ. For example, the top five companies that IBB holds are not represented in WDNA’s top holdings. Moreover, WDNA is also globally diversified. Unlike the previous ETFs, U.S. biotech stocks only make up around 82% of its portfolio. The ETF charges a 0.45% expense ratio.
Direxion Daily S&P Biotech Bull 3x Shares (LABU)
The high volatility present in the biotech industry makes it an attractive target for short-term traders. While you can trade options on biotech ETFs like IBB for magnified exposure, you can also use leveraged ETFs like LABU. This ETF targets a daily return of three times that of the S&P Biotechnology Select Industry Index, the same benchmark utilized by XBI. As such, it’s best suited for a bullish trader.
If you’re bearish on the short-term prospects of the biotech industry, the ETF to watch is the Direxion Daily S&P Biotech Bear 3X Shares (LABD), which is the opposite of LABU. However, both ETFs are costly, with expense ratios of 0.96% and 1.1%, respectively. In addition, holding either ETF long term is not advised due to the negative effects of compounding returns and high volatility caused by the leverage.
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7 Best Biotech ETFs to Buy Now originally appeared on usnews.com
Update 06/28/24: This story was previously published at an earlier date and has been updated with new information.
