It's no surprise that buying a basket of stocks is typically safer than buying individual stocks. By spreading out your investment over a few different companies, you're less exposed to the risk of individual businesses having a poor quarter or experiencing an event that negatively impacts their revenue.
And if you invest in an exchange-traded fund (ETF) that holds a few different companies in the same industry, you'll have an asset that tracks that industry's growth. Today, I'll be discussing a trio of ETFs that are oriented around the top stocks in cannabis and biotech, both of which are industries that are expected to expand considerably over the next decade and beyond.
Importantly, all three of the funds are down by quite a bit in comparison to their prices one year ago, which means that they're available at a discount. In the long run, they could still see incredible appreciation, and that's what might make them attractive to purchase right now.
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1. SPDR S&P Biotech ETF
The SPDR S&P Biotech ETF (XBI -1.12%) holds a handful of biotech stocks from the S&P Biotechnology Select Industry Index. With net assets of $7.1 billion, it's one of the largest ETFs in the biotech sector.
Many of its holdings, such as Intellia Therapeutics, Editas Medicine, and Ocugen, don't have any product that's approved for sale as of yet. That means there's a lot of exposure to clinical development risk, but also a considerable amount of exposure to upside from the successful commercialization of new medicines.
Most of the stocks in this fund have small or medium market caps. And they're not exactly known for having well-grounded valuations, which leaves the ETF at risk of collapsing when investors are fleeing to quality. In the past 12 months, it fell by more than 41%. But during more speculative periods when valuations matter less, its components can soar in price.
With an expense ratio of 0.35% and a dividend yield of 0.23%, this isn't a particularly expensive fund to own. If you're looking to make a somewhat speculative bet on the biotech industry as a whole, the SPDR S&P Biotech ETF should be high on your list of options.
2. iShares Biotechnology ETF
An even larger fund than the SPDR Biotech ETF is the iShares Biotechnology ETF (IBB -0.85%), which maintains net assets of nearly $10 billion.
Its mix of stocks tends to favor larger biotechs, such as Moderna and BioNTech, as well as deeply established businesses that are more accurately classified as pharma companies like Gilead Sciences and Vertex Pharmaceuticals. That means the fund is less exposed to its individual components crashing as these more mature companies are more likely to have multiple sources of revenue up and running, which mitigates the impact of setbacks in the drug development process. The fund also holds shares of businesses that make critical inputs for biopharma, such as Illumina.
Down by around 23% since January of 2021, its yield is quite small at 0.17%, and its expense ratio is 0.45%, making it neither expensive nor cheap to hold. Because its mix of holdings is a bit stabler than the previous ETF I discussed, this fund is probably the better choice for more conservative investors who still want exposure to the biopharma sector.
3. AdvisorShares Pure US Cannabis ETF
As the name implies, the AdvisorShares Pure US Cannabis ETF (MSOS 6.25%) invests in a group of cannabis stocks and cannabis stock derivatives like swaps. It has only $1.1 billion in net assets, has a high expense ratio of 0.74%, and it doesn't pay any dividend. That puts its holding cost on the higher end.
The ETF is packed with securities of small- and medium-cap cannabis businesses, such as Green Thumb Industries, Trulieve Cannabis, and Curaleaf. Nearly all of these companies are producing revenue although many of them remain unprofitable. So as the cannabis industry grows and these competitors become more efficient while expanding their operations, holders stand to benefit immensely.
Why is this fund worth considering now? It is down nearly 52% in the past 12 months, and cannabis stocks as a whole have had a bruising year. So that might mean their valuations are attractive, on average. Assuming that the industry itself keeps growing, the companies that are powering the growth could (eventually) be good investments.
