Want to invest in an exciting and fast-growing sector? Biotech offers such an opportunity. Hundreds of biotech companies are hard at work developing innovative therapies. Some of them could even be game-changers in how diseases are prevented and treated.
There's one big downside to investing in biotech stocks, though. Many of them are very risky. The good news is that you can lower your risk level and the volatility of your portfolio by investing in exchange-traded funds (ETFs) that focus on the biotech sector instead of buying individual biotech stocks.
Understanding biotech ETFs
ETFs are similar to mutual funds in that they can own lots of stocks (and sometimes other assets). Mutual funds, though, are only priced once per day, and you can only buy mutual funds through a brokerage or directly from the issuer.
On the other hand, ETFs trade on public exchanges just as individual stocks do. Like a stock, you can buy or sell an ETF instantaneously.
Investing in an ETF comes with a cost beyond just the transaction charge that a brokerage might require. The funds charge fees to cover their operating costs. The expense ratio of an ETF is the fund's operating expenses divided by the fund's average assets.
Biotech ETFs have all the characteristics of ETFs in general. The key difference is that these ETFs hold only the stocks of companies that focus on biotechnology.
Best biotech ETFs
The best biotech ETFs tend to be the biggest ones. They have large total assets under management and relatively low expense ratios. Below are five of the best biotech ETFs to invest in right now.
iShares Biotechnology ETF
- Total assets: $10.2 billion
- Expense ratio: 0.45%
- Dividend yield: 0.17%
The iShares Biotechnology ETF (NASDAQ:IBB) attempts to track the results of an index that includes all U.S.-listed stocks in the biotechnology sector. This ETF currently owns close to 270 biotech stocks.
Among the iShares Biotechnology ETF's top holdings are some of the biggest biotech stocks based on market cap rank. They include Amgen (NASDAQ:AMGN), Gilead Sciences (NASDAQ:GILD), Moderna (NASDAQ:MRNA), and Regeneron Pharmaceuticals (NASDAQ:REGN).
Since its inception in 2001, this ETF has delivered an average annualized total return of more than 8%. Over the past five years, it has generated an annualized total return of around 11%.
SPDR S&P Biotech ETF
- Total assets: $7.9 billion
- Expense ratio: 0.35%
- Dividend yield: 0.23%
The SPDR S&P Biotech ETF (NYSEMKT:XBI) seeks to track the S&P Biotechnology Select Industry Index. This index uses a modified equal weighting, which means the percentage of total assets for each stock owned is roughly the same. It gives investors exposure to large-cap, mid-cap, and small-cap biotech stocks.
This ETF currently owns around 190 stocks. Its top holdings include ChemoCentryx (NASDAQ:CCXI), Cytokinetics (NASDAQ:CYTK), Ocugen (NASDAQ:OCGN), Acceleron Pharma (NASDAQ:XLRN), and Arrowhead Pharmaceuticals (NASDAQ:ARWR). However, because of its modified equal weighting, none of the largest positions in the ETF make up a significantly greater percentage of assets than other stocks do.
The SPDR S&P Biotech ETF has delivered a total annualized return of around 14% since its inception in 2006. Over the past five years, this ETF generated an average annual return of close to 17.5%.
ARK Genomic Revolution ETF
- Total assets: $7.1 billion
- Expense ratio: 0.75%
- Dividend yield: 0%
The ARK Genomic Revolution ETF (NYSEMKT:ARKG) is one of several exchange-traded funds operated by Cathie Wood's ARK Invest. The fund invests in the stocks of companies that incorporate genomics into their businesses. In particular, it concentrates on gene-editing stocks, molecular diagnostics stocks, virtual care stocks, and the stocks of companies developing targeted therapeutics.
This ETF typically owns between 40 and 60 stocks. Its current top positions include Teladoc Health (NYSE:TDOC), Exact Sciences (NASDAQ:EXAS), Pacific Biosciences of California (NASDAQ:PACB), Ionis Pharmaceuticals (NASDAQ:IONS), and Twist Bioscience (NASDAQ:TWST).
The ARK Genomic Revolution ETF began trading in 2014. Since then, it has generated an average annual return of more than 22%. Over the past five years, the ETF's annualized return is close to 32%.
First Trust NYSE Arca Biotechnology Index Fund
- Total assets: $1.78 billion
- Expense ratio: 0.55%
- Dividend yield: 0%
The First Trust NYSE Arca Biotechnology Index Fund (NYSEMKT:FBT) seeks to track the performance of the NYSE Arca Biotechnology Index. This index owns equal weights of the stocks of a cross-section of biotech companies, including those focused on genomics and developing monoclonal antibody-based technologies.
This ETF currently has close to 30 positions. Its top holdings include Regeneron Pharmaceuticals, Acadia Pharmaceuticals (NASDAQ:ACAD), Seagen (NASDAQ:SGEN), BioMarin Pharmaceutical (NASDAQ:BMRN), and FibroGen (NASDAQ:FGEN).
Since this ETF's inception in 2006, it has achieved an average annual total return of nearly 15%. Over the past five years, the fund generated an annualized return of a little less than 11%.
Related Investing Topics
VanEck Biotech ETF
- Total assets: $563 million
- Expense ratio: 0.35%
- Dividend yield: 0.3%
The VanEck Biotech ETF (NASDAQ:BBH) tries to own the most liquid biotech companies based on market cap and trading volume. As such, its approach tends to favor the biggest companies in the biotech sector. This ETF's portfolio can include U.S. companies, as well as foreign companies listed on U.S. stock exchanges.
This ETF currently owns 25 biotech stocks. Its top holdings include Moderna, Amgen, Iqvia Holdings (NYSE:IQV), Icon (NASDAQ:ICLR), and Vertex Pharmaceuticals (NASDAQ:VRTX).
The VanEck Biotech ETF was launched on Dec. 20, 2011. Since then, the fund has generated an annualized total return of around 19.5%. Over the past five years, the ETF's average annual return tops 14.5%.
