Is iShares Nasdaq Biotechnology Index Fund a Buy?

The biotechnology industry is one of the most hazardous places for stock pickers. Volatility is high, even among the largest companies. Creating new compounds and processes that solve complicated medical problems is not an easy business, and there's frequent failure to get viable new products to market.

Often times, the adage "it's better to be lucky than talented" applies to a biotech's development pipeline. The same can also be said for investors trying to pick big winners from the biotech universe too, which harkens back to a familiar Warren Buffett quote: "Risk comes from not knowing what you're doing."

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For investors who don't know ins-and-outs of biotech (like myself), picking individual stocks can be dangerous. That's where an ETF comes in, like the biggest biotech ETF out there: the iShares Nasdaq Biotechnology Fund (IBB 0.41%).

Here's how it stacks up next to its peers SPDR S&P Biotech ETF (XBI 0.19%) and First Trust NYSE Arca Biotech ETF (FBT 0.83%)

Data source: iShares, SPDR, and First Trust.  

The iShares option is the oldest, largest, and most diverse biotech ETF available, and its expense ratio is industry standard.

It's worth noting over the last decade iShares has lagged behind its competition because of the composition of the fund; iShares weights its holdings by market capitalization. This means the bigger companies drive overall returns, and since those top five holdings have been a mixed bag over the last few years, the fund has also lagged.  

Meanwhile, SPDR Biotech and First Trust Biotech ETFs are both equal weighted, with each stock receiving equal representation in the fund. Smaller winners have meant greater returns for these funds, although with more profit comes greater tax implications when the funds are rebalanced. 

Data by YCharts.

First, let's look at the makeup of the big-player driven fund:

Holdings as of March 6, 2019. Data source: iShares.  

Next, see how smaller companies, which are often takeover targets, drive the growth of the SPDR fund:

Holdings as of March 6, 2019. Data source: SPDR.  

And First Trust Biotech too:

Holdings as of March 6, 2019. Data source: First Trust.  

Is it a buy?

Biotechnology is a unique growth industry, but the risks are higher than average. For those without the technical know-how and the stomach for some wild moves -- even when well-diversified -- the iShares Nasdaq Biotechnology Fund is a solid choice. It offers lower overall returns than some of its peers due to the overweighting toward the biggest players in the space, but it has also exhibited the lowest volatility over time. That could make this one of the tamest pure-play bets on the wild sector.

For broader exposure to healthcare, there's also the Vanguard Health Care ETF (VHT 0.20%), which has 385 stocks, and 20% of its assets are dedicated specifically to biotech. It has a management fee of just 0.10% a year and is far less volatile than the biotech pure plays because it also includes more stable segments of the healthcare universe. 

Nevertheless, for those who want targeted exposure to biotech, the iShares Nasdaq Biotechnology Fund is a good option. The management fee is reasonable, and there's plenty of diversification to smooth out a few of the hang-ups that can be problematic with investing in individual biotech stocks.