This article was updated on Dec. 9, 2017, and originally published on June 22, 2017.

Biotech investing comes with its own rules that can be quite different from buying stocks in other industries. Investors must be especially careful buying stocks of individual biotechnology companies because of the high risks involved. Buying an exchange-traded fund (ETF) that owns many biotechs and closely follows one of the industry's indexes is a smart way to lower risk. Three biotech ETFs stand out as the top choices:

ETF

Net Assets

Net Expense Ratio

iShares NASDAQ Biotechnology (NASDAQ:IBB) $9.84 billion 0.47%
SPDR S&P Biotech ETF (NYSEMKT:XBI) $3.97 billion 0.35%
First Trust NYSE Arca Biotech ETF (NYSEMKT:FBT) $1.23 billion 0.56%

Data source: Yahoo! Finance.

Here's what makes these ETFs ones to consider for investors looking to profit from the biotech industry.

Three scientists look at a DNA image.

Image source: Getty Images.

iShares Nasdaq Biotechnology

The iShares Nasdaq Biotechnology is the oldest biotech ETF and the largest in terms of net assets. This ETF was launched in 2001. It tries to track the investment results of an index composed of biotechnology and pharmaceutical equities listed on the Nasdaq stock exchange.

Since inception, the iShares Nasdaq Biotechnology ETF has achieved an average annual return of 7.66%. Over the past five years, the ETF has generated an average annual return of 18.71%. 

The ETF currently owns shares of 159 biotech companies. Top holdings include CelgeneBiogen, Amgen, and Gilead Sciences. Because the ETF includes several large biotechs that pay dividends, its 0.46% yield ranks as the highest of these three top biotech ETFs. 

SPDR S&P Biotech ETF

The SPDR S&P Biotech ETF launched in January 2006. It attempts to generally track the investment results of the S&P Biotechnology Select Industry Index and has an expense ratio of 0.35%, which is relatively low compared with other biotech ETFs.

Since inception, the ETF has generated an average annual return of 15.07%. Over the past five years, it has produced an average annual return of 23.67%.

The number of holdings in the SPDR S&P Biotech ETF currently stands at 102. While the iShares Nasdaq Biotechnology gives greater weight to biotechs with larger market caps, the SPDR S&P Biotech ETF maintains more equalized weights for all stocks. As a result, the ETF's top holding, BioMarin Pharmaceutical, makes up only 1.72% of total assets held.

First Trust NYSE Arca Biotech ETF

The First Trust NYSE Arca Biotech ETF launched in June 2006, less than five months after the inception of the SPDR S&P Biotech ETF. The investment objective of the ETF is to replicate as closely as possible the investment results of the NYSE Arca Biotechnology Index.

This ETF claims the best performance of the three since inception, achieving an average annual return of 17.52%. During the past five years, the First Trust NYSE Arca Biotech ETF has generated an average annual return of 22.28%.

The First Trust NYSE Arca Biotech ETF currently holds positions in 30 biotech stocks. Its top holdings include Nektar Therapeutics, United Therapeutics, and Neurocrine Biosciences.

Which ETF is best for you?

If you're looking to get exposure primarily to large biotech stocks, the iShares Nasdaq Biotechnology ETF is probably your best alternative. The top 10 holdings of this ETF comprise almost 55% of total assets. These top holdings, as mentioned earlier, are larger biotechs. Your exposure to smaller biotechs, therefore, is more limited. 

If you would prefer to not be as loaded up with bigger biotech stocks, the two other ETFs are probably better choices for you. The SPDR S&P Biotech ETF gives you more diversification, since it holds more than three times the number of stocks as the First Trust NYSE Arca Biotech ETF does. Also, if expenses are a big issue for you, the SPDR S&P Biotech ETF is your best pick.  

Keith Speights owns shares of Celgene, Gilead Sciences, and SPDR S&P Biotech. The Motley Fool owns shares of and recommends Alnylam Pharmaceuticals, Celgene, and Gilead Sciences. The Motley Fool recommends Biogen and Juno Therapeutics. The Motley Fool has a disclosure policy.