Biotechnology, a field that studies the basic building blocks of biology and living organisms along with techniques to leverage biology for everything from health care to manufacturing, is a massively growing industry.
It’s easy to understand why. Biotechnology has become of major importance during the pandemic, as many biotech firms have been responsible for the vaccines and therapies that will help reduce its impact. Other types of biotechnology businesses focus on solutions for major problems such as cancer or climate change.
We reviewed many funds in this area to come up with this list of the best five biotechnology exchange-traded funds (ETFs) to invest in. Presented in no particular order, we selected these funds based on their size, investment costs, history of returns, and their specific focuses within the world of biotechnology.
|ETF Name||AUM (as of Jan. 11, 2022)||Expense Ratio||Inception Date|
|iShares Biotechnology ETF||$9.4 billion||0.45%||Feb. 5, 2001|
|ARK Genomic Revolution ETF||$5.5 billion||0.75%||Oct. 31, 2014|
|SPDR S&P Biotech ETF||$6.1 billion||0.35%||Jan. 31, 2006|
|iShares Genomics Immunology and Healthcare ETF||$298 million||0.47%||June 11, 2019|
|ALPS Medical Breakthroughs ETF||$165.6 million||0.50%||Dec. 30, 2014|
iShares Biotechnology ETF
- Three-year return (as of Jan. 11, 2022): 16.62%
- Expense ratio: 0.45%
- Assets under management (AUM as of Jan. 11, 2022): $9.4 billion
- Inception date: Feb. 5, 2001
The iShares Biotechnology ETF (IBB) is a fund that’s focused on investing in American biotech businesses. Most of its holdings are health-care companies that focus on developing new pharmaceuticals and treatments for diseases.
The fund is the largest on our list, with more than $9 billion in assets under management (AUM). This means that investors will have little trouble buying and selling shares in the fund. Its expense ratio is 0.45%, equivalent to $4.50 for each $1,000 invested.
ARK Genomic Revolution ETF
- Three-year return (as of Jan. 11, 2022): 33.40%
- Expense ratio: 0.75%
- Assets under management (AUM as of Jan. 11, 2022): $5.5 billion
- Inception date: Oct. 31, 2014
It has a slightly wider focus than just biotechnology. Instead, it invests in businesses that are “focused on and are expected to substantially benefit from extending and enhancing the quality of human and other life” through genomics. This means the fund is concentrated on health care, information technology, materials, and energy businesses.
It has performed well over the past three years, and has $5.5 billion in assets, making it one of the larger funds on this list. However, its active management leads to a high management fee compared with some alternatives. The fund’s expense ratio is 0.75%, equivalent to $7.50 for every $1,000 invested.
SPDR S&P Biotech ETF
- Three-year return (as of Jan. 11, 2022): 15.9%
- Expense ratio: 0.35%
- Assets under management (AUM as of Jan. 11, 2022): $6.1 billion
- Inception date: Jan. 31, 2006
The SPDR S&P Biotech ETF (XBI) is an index fund that aims to track the S&P Biotechnology Select Industry Index. This index is largely composed of biotech companies that work in health care and on developing medicines and therapeutics.
The passive management of the fund means it’s the cheapest of the funds on our list. Its expense ratio of 0.35% is equivalent to $3.50 for every $1,000 invested. The fund has more than $6 billion in assets, so investors need not worry about liquidity.
iShares Genomics Immunology and Healthcare ETF
- Three-year return (as of Jan. 11, 2022): N/A
- Expense ratio: 0.47%
- Assets under management (AUM as of Jan. 11, 2022): $298 million
- Inception date: June 11, 2019
The iShares Genomics Immunology and Healthcare ETF (IDNA) invests in companies across the globe with a specialty in companies “along the full value chain of genomics, immunotherapy, and health-care industries.” This may make it of interest to investors who want a fund with a global portfolio and a wider focus than simply health care.
The fund has just under $300 million in assets, which is small enough that investors may have to consider liquidity issues when buying or selling shares.
The smaller a fund is, the fewer investors will be looking to buy or sell shares at any one time. In some cases, there may be no one looking to buy or sell. This low liquidity can make it hard to purchase or unload shares at the fund’s market price.
The fund charges an expense ratio of 0.47%, equivalent to $4.70 for every $1,000 invested.
ALPS Medical Breakthroughs ETF
- Three-year return (as of Jan. 11, 2022): 14.42%
- Expense ratio: 0.50%
- Assets under management (AUM as of Jan. 11, 2022): $165.6 million
- Inception date: Dec. 30, 2014
The ALPS Medical Breakthroughs ETF (SBIO) invests in mid-capitalization and small-cap businesses in the world of biotechnology. Each company in the index that the fund tracks has at least one drug in a Phase II or Phase III clinical trial.
This means investors get exposure to businesses that are in the process of getting a drug approved. If successful, the company may gain significantly in value. The downside is that if a drug fails to receive approval that could cause the business—and its stock—to lose value.
This fund allows its investors to easily build a diversified portfolio of companies going through trials, spreading out the risk and potential reward.
The fund charges an expense ratio of 0.50%, equivalent to $5 for every $1,000 invested. However, it has just $165 million under management, which is the smallest amount of any fund on this list. Investors may be concerned about liquidity when buying and selling shares.
Pros and Cons of Investing in Biotech
Major profit potential with successful drug or product trials
The market for biotech is growing
Many biotech companies are good ESG investments
Potential for losses with failed trials
Trials take a long time
Limited time to profit from new developments
- Major profit potential with successful drug or product trials. Companies that are developing drugs or other health-care technology tend to experience gains in value after a successful clinical trial.
- The market for biotech is growing. Biotechnology is a quickly expanding field. Between 2020 and 2026, the market for biotech products is expected to grow by more than 8.5% per year.
- Many biotech companies are good ESG investments. Environmental, social, and governance (ESG) investing has become more popular in recent years. Many biotech firms are strong examples of this type of investing, which may help them outperform other portions of the market.
- Potential for losses with failed trials. Companies that announce negative results from a clinical trial often lose value. If the business was focused on a single drug or treatment, a failing trial could even lead to the company folding.
- Trials take a long time. Before a biotech company can sell its product, it typically has to go through a clinical trial. This can take several years, so investors in these ETFs need to have a long time horizon for their investments.
- Limited time to profit from new developments. Patents for new drugs and pharmaceuticals in the U.S. last for 20 years. After that, competitors can create generic versions of the product, reducing profit potential. This means biotech companies have to be constantly creating products to succeed over the long term, accepting the risk that comes with constant research and development.
Historical Performance Trends
Over the past five years, biotechnology has seen significant growth. The Nasdaq Biotechnology Index rose from about 2,900 points in January 2017 to a high of almost 5,460 points in September 2021.
However, over the short term, biotechnology hasn’t performed as well. In 2021, the sector experienced significant volatility, with the index ultimately falling below 4,600 from its high point of nearly 5,500.
Is a Biotech ETF Right for Me?
Biotechnology is an exciting and growing field, but investors interested in the industry need to consider the risks and volatility involved. Buying shares in a biotech ETF is an easy way to build a diversified portfolio, which reduces the risk of failed clinical trials.
The biotech industry’s trading patterns are unstable and investors need to be prepared to commit to the sector for the long term.
How Do Biotech ETFs Work?
Biotech ETFs work by buying shares in many companies in that sector. Investors can own shares in such ETFs to easily invest in a diversified biotech portfolio.
How Can I Buy Biotech ETFs?
You can buy biotech ETFs through your brokerage account. Some brokerage houses operate their own ETFs, which may help you choose which broker you want to work with.
When Should I Buy Biotech ETFs?
Knowing when to buy is one of the hardest parts of investing. All investing involves risk, and ETFs can be volatile. You should invest when you’re willing to accept that and can hold your investment for the long term.
The Bottom Line
Biotech ETFs are a good way for investors to get exposure to the exciting, if volatile, biotech industry. Biotech has become even more important in the age of the pandemic, and there’s significant potential for the industry to continue growing in the future.
The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.
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