Want to invest in an exciting and fast-growing sector? Biotech offers an opportunity to do so. Hundreds of biotech companies are hard at work developing innovative therapies. Some could even be game changers in preventing and treating diseases.
Exchange-Traded Fund (ETF)
There's one big downside to investing in biotech stocks, though. Many are very risky. The good news is that you can lower your risk level and portfolio volatility 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, however, are only priced once per day. Plus, you can only buy mutual funds through a brokerage or directly from the issuer.
On the other hand, ETFs trade on public exchanges just like individual stocks. And, like a stock, you can instantly buy or sell an ETF.
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 calculated by dividing the fund's operating expenses by its 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 in 2024
The best biotech ETFs tend to be the biggest ones. They have large amounts of assets under management and relatively low expense ratios. Here are five of the best biotech ETFs.
1. iShares Biotechnology ETF
- Total assets: $9.1 billion
- Expense ratio: 0.44%
- Dividend yield: 0.17%
The iShares Biotechnology ETF (IBB 0.65%) attempts to track the results of an index that includes all U.S.-listed stocks in the biotechnology sector. The ETF currently owns around 275 biotech stocks.
Among the iShares Biotechnology ETF's top holdings are some of the biggest biotech stocks based on market capitalization rank. They include Amgen (AMGN 0.22%), Gilead Sciences (GILD 0.23%), Moderna (MRNA 1.69%), and Regeneron Pharmaceuticals (REGN -0.84%).
Since its inception in 2001, the ETF has delivered an average annualized total return of 6.6%. Over the past five years, it has generated an annualized total return of about 4.5%.
2. SPDR S&P Biotech ETF
- Total assets: $7.8 billion
- Expense ratio: 0.35%
- Dividend yield: 0.23%
The SPDR S&P Biotech ETF (XBI 1.54%) seeks to track the S&P Biotechnology Select Industry Index. The 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.
The ETF currently owns around 150 stocks. Its top holdings include Madrigal Pharmaceuticals (MDGL -0.54%), Exact Sciences (EXAS 0.1%), TG Therapeutics (TGTX -3.16%), and Acadia Pharmaceuticals (ACAD 2.45%). 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.
The SPDR S&P Biotech ETF has delivered a total annualized return of about 10% since its inception in 2006. Over the past five years, however, the ETF generated an average annual return of negative 0.3%.
3. Ark Genomic Revolution ETF
- Total assets: $1.9 billion
- Expense ratio: 0.75%
- Dividend yield: 0%
The Ark Genomic Revolution ETF (ARKG 0.74%) 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. It concentrates on gene-editing stocks, molecular diagnostics stocks, virtual care stocks, and the stocks of companies developing targeted therapeutics.
The ETF typically owns between 40 and 60 stocks. Its current top positions include Exact Sciences, Pacific Biosciences of California (PACB 6.52%), Ionis Pharmaceuticals (IONS -0.6%), Teladoc Health (TDOC -2.4%), and CareDx (CDNA 0.0%).
The Ark Genomic Revolution ETF began trading in 2014. Since then, it has generated an average annual return of more than 5%. Over the past five years, the ETF's annualized return is close to 4%.
4. First Trust NYSE Arca Biotechnology Index Fund
- Total assets: $1.55 billion
- Expense ratio: 0.55%
- Dividend yield: 0%
The First Trust NYSE Arca Biotechnology Index Fund (FBT 0.74%) seeks to track the performance of the NYSE Arca Biotechnology Index. The 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.
The ETF currently has about 30 positions. Its top holdings include Agios Pharmaceuticals (AGIO -0.57%), Seagen (NASDAQ:SGEN), BioMarin Pharmaceutical (BMRN -1.53%), Exelixis (EXEL 0.72%), and FibroGen (FGEN 1.96%).
Since the ETF's inception in 2006, it has achieved an average annual total return of about 13%. Over the past five years, the fund generated an annualized return of more than 4%.
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5. VanEck Biotech ETF
- Total assets: $517 million
- Expense ratio: 0.35%
- Dividend yield: 0.35%
The VanEck Biotech ETF (BBH 0.53%) 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. The ETF's portfolio can include U.S. companies, as well as foreign companies listed on U.S. stock exchanges.
The ETF currently owns 25 biotech stocks. Its top holdings include Amgen, Gilead Sciences, Vertex Pharmaceuticals (VRTX -0.06%), Moderna, and Iqvia Holdings (IQV 0.39%).
The VanEck Biotech ETF was launched on Dec. 20, 2011. Since then, the fund has generated an annualized total return of about 15%. Over the past five years, the ETF's average annual return was close to 5.5%.
