There's a big gap between the year-to-date performances of the top two exchange-traded funds (ETFs) focusing on biotechs. The iShares Biotechnology ETF (IBB -0.20%) has delivered a solid double-digit percentage gain. Meanwhile, the SPDR S&P Biotech ETF (XBI -0.89%) is in negative territory year to date and is close to 25% below its February highs.
The key to success for the iShares Biotechnology ETF (IBB) has been Moderna (MRNA 0.89%). The vaccine stock is the biggest holding for the ETF and has more than quadrupled so far this year.
The SPDR S&P Biotech ETF (XBI) also includes Moderna in its holdings. However, it uses a modified equal weighting, so one stock doesn't drive gains nearly as much as it would for IBB. But don't expect XBI to remain a laggard. Here's why buying this beaten-down ETF could double your money over the next five years.
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An encouraging track record
Past performance isn't a guarantee of future results. State Street, which runs the XBI ETF, would be quick to point that out -- as would any other company that offers an ETF. However, looking at how a fund has performed in the past can sometimes give a clue to what it's capable of doing in the future.
XBI boasts a track record that should be encouraging for investors hoping that the ETF might double by late 2026. Since the fund's inception in 2006, XBI has delivered an average annual return after taxes on distributions and sales of fund shares of 12.87%. If the ETF could deliver that average gain over the next five years, its total return would amount to 186%.
Over the last decade, there have been seven full five-year periods (beginning with the start of the calendar year). XBI at least doubled in five of them. It achieved gains of well over 200% in two of the five-year periods.
What about the performance over the last five years from today? XBI is up more than 90%. That obviously isn't a double, but it's really close.
Big opportunities in biotech
There's a much more important reason, though, why I think that XBI could at least double over the next five years. The opportunities for biotech stocks, in general, are tremendous.
On a macro level, the advances that companies are making are impressive and could pay off big time over the next few years. Gene editing, DNA synthesis, and genomic testing represent just some of the technologies that could provide major catalysts. XBI holds positions in several stocks that are well-positioned to be winners in these areas.
Let's take gene editing. XBI owns shares of Editas Medicine (EDIT -2.02%), which is only days away from presenting initial clinical data for its CRISPR therapy EDIT-101 in treating rare genetic eye disease Leber congenital amaurosis type 10.
XBI also has a stake in Twist Bioscience (TWST -2.38%). The company is a pioneer in DNA synthesis. This technology holds the potential to disrupt not only healthcare but other markets including agriculture and food as well.
DermTech (DMTK -0.33%) stands out as another promising stock owned by XBI. The company's genomics platform offers the opportunity to radically change skin cancer testing.
A built-in advantage
One inherent problem with investing in biotech stocks is that the risk level is high. Companies like Editas, Twist, and DermTech could fail in their efforts to develop and market products. However, XBI has a built-in advantage that was mentioned earlier: It owns stocks in relatively equal weights. No single stock makes up even 1% of XBI's overall holdings.
If Moderna's share price plunges, so will the IBB ETF. However, if one or two of XBI's nearly 200 stocks implode, it won't impact the ETF's performance all that much. This diversification and relative equal weighting reduce the risk level for XBI.
Buying XBI is as close as you'll come to betting on the biotech industry overall instead of trying to pick individual winners. If biotech companies deliver on the promise of their technologies, this ETF could easily double within the next five years.
