Biotech investing can feel a little bit like a Vegas sportsbook sometimes. Pick the company with the right drug trial and you could be swimming in profits. Miss that pick and you could easily see your investment getting cut in half.
Investing, of course, isn't gambling. And there are conditions that investors looking to make good decisions should be aware of when assessing the health of the biotech space. Such as the ones that are developing right now.
A pair of macro tailwinds are building that could drive biotech returns heading into 2026. The sector has been outperforming the S&P 500 since August, and the trend could still be in the early innings.
Let's look at what's driving the biotech sector right now and why the SPDR S&P Biotech ETF (XBI +0.72%) could be a great way to play the sector.
Regulation and the return of dealmaking
If there's one downside to the biotech sector, it's time. From discovery to approval, new drugs can take 10 years before they finally hit the market. Along the way, companies may spend millions of dollars pushing a treatment through the process, all in the hope of generating revenue from it at some point years down the road. It's estimated that fewer than 10% of the drugs that enter the clinical trial stage ultimately get approved for commercial use.
It's a big reason why biotech investing can be a "feast or famine" proposition and why it comes with a high degree of risk.
But a blunting of risk might be on the way.
President Donald Trump has made deregulation a focus of his second administration. So far, it has mostly focused on the financial and cryptocurrency sectors, including efforts to reduce oversight from the Consumer Financial Protection Bureau (CFPB) and promote more widespread acceptance of cryptocurrencies.
Some think those efforts could soon extend to the healthcare space, which is one of the economy's more heavily regulated sectors. While it's still unclear what this could look like, how long it might take to implement, or if anything Trump puts in place would extend beyond his term, fewer regulations would have the potential to lower compliance costs and speed up the drug approval process.
But that's only part of the story.
Image source: Getty Images.
The other potential catalyst is mergers & acquisitions (M&A). An increase in M&A activity is generally a sign of insider optimism about where the sector is heading. Executives tend to pursue acquisitions when they believe that the economy or their sector will keep expanding, financing is relatively inexpensive, or growth opportunities exist that could justify the price.
According to Leerink Partners, the number of biotech deals already announced in 2025 exceeds the average annual deal count of the past 15 years. The pharma sector saw a 71% increase in venture financing deals -- which involve investors giving money to early-stage companies -- in Q3 2025 compared to the previous quarter. The total was around $3 billion.
It's clear that a larger pattern is developing here. Companies are seeing a positive outlook for the biotech sector and are increasing the amount of money being invested in it. Deregulation could be fuel on the fire for that pace of activity.
The biotech sector is finally beginning to wake, and one ETF may be well-positioned to capture these emerging trends.
Why XBI is built for this kind of setup
There are several exchange-traded funds (ETFs) that give you exposure to the biotech space, but I think the simplest approach is probably the best.
The SPDR S&P Biotech ETF tracks the S&P Biotechnology Select Industry Index, which seeks to provide equal weighted, unconcentrated industry exposure across large-, mid- and small-cap stocks.
NYSEMKT: XBI
Key Data Points
The key feature here is the lack of concentration. Instead of being an ETF that maintains overweight positions in heavyweights such as Amgen, Gilead Sciences, and Vertex Pharmaceuticals, XBI equal-weights across more than 100 different companies. That means SPDR S&P Biotech ETF investors are getting better exposure to the industry's themes and innovations instead of relying on the success of just a few big companies.
Also consider that the majority of new drug developments and innovations over the past decade came from smaller biotech companies. It makes a lot of sense to include those companies in your portfolio as opposed to just focusing on the big ones. Risks get spread out, and you get exposure to a wider set of opportunities.
The SPDR S&P Biotech ETF has an expense ratio of 0.35%, which is typical for ETFs focused on biotech or medical advancements. It's up 25% year-to-date as of Nov. 14, and has delivered a 10.5% average annual return since its 2006 inception.
In short:
- Equal weighting reduces company-specific risk.
- Large companies buying small companies, where the majority of drug development is happening, can result in big acquisition premiums.
- Diversification reduces the reliance on trying to pick individual winners. Instead, it focuses on the sector's success.
The case for biotech keeps getting better
Investing in biotech will probably always require taking on some risk, but the current setup might be the best it's been in years.
Policy momentum is shifting toward deregulation. Dealmaking, a sign of industry and investor confidence, is accelerating. Money is flowing back into the sector. We're already seeing stock prices start to reflect these catalysts, and the upside may not be over. The SPDR S&P Biotech ETF is probably one of the cleanest ways to invest in biotech.
The story may just be getting started.