Investors must be very 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) $7.75 billion 0.47%
SPDR S&P Biotech ETF (NYSEMKT:XBI) $2.95 billion 0.35%
First Trust NYSE Arca Biotech ETF (NYSEMKT:FBT) $931 million 0.56%

Data source: Yahoo! Finance.

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

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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 7.04%. Over the past five years, the ETF has generated an average annual return of 19.15%. 

The ETF currently owns shares of 162 biotech companies. Top holdings include Celgene, Amgen, and Biogen. 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 a relatively low net expense ratio compared with other biotech ETFs.

Since inception, the ETF has generated an average annual return of 13.67%. Over the past five years, it has produced an average annual return of 20.99%.

The number of holdings in the SPDR S&P Biotech ETF currently stands at 99. 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, Clovis Oncology, makes up only 2.91% 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 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 16.46%. During the past five years, the First Trust NYSE Arca Biotech ETF has generated an average annual return of 19.75%.

The First Trust NYSE Arca Biotech ETF currently holds positions in 30 biotech stocks. Its top holdings include Alnylam Pharmaceuticals, Myriad Genetics, and Regeneron Pharmaceuticals.

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 60% 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 and SPDR S&P Biotech ETF. The Motley Fool owns shares of and recommends Alnylam Pharmaceuticals, Biogen, and Celgene. The Motley Fool has a disclosure policy.