The 4 Top Biotech ETFs

Biotechnology has been on the cutting edge of healthcare for years, and countless new treatments have made life better for millions of people across the globe. Investing in biotechnology companies can be extremely risky, because the success or failure of a single candidate treatment can make or break the company's entire future.

To reduce the risk of a cataclysmic loss, many investors prefer to use exchange-traded funds to get exposure to a host of different biotechnology investments. In particular, the following four biotech ETFs have attracted a large amount of investment capital. Let's look at what makes them tick and whether one or more might be suitable for you.

Data source: Fund providers, ETFdb.com.

The big two in the biotech ETF space

As with many other parts of the ETF world, two fund providers dominate the biotech ETF space. The iShares ETF is the largest covering the sector, tracking a set of biotechnology and pharmaceutical stocks that trade on the Nasdaq stock market. With almost 200 stocks in its portfolio, the iShares ETF claims about 80% of its assets are invested in biotechnology specifically, with the remaining 20% split between pharmaceutical companies and businesses specializing in tools and services for the life sciences industry. Some investors don't like this watering-down of biotech exposure, while others like the idea of a slightly more diversified set of investments that still focuses heavily on biotechnology. The ETF is also market-cap weighted, allocating to the four top giants in the biotech industry a total of more than 30% of the entire fund's portfolio. Those factors are likely responsible for the ETF's relative underperformance compared to its biotech fund peers.

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The SPDR ETF also has a strong following, with fewer assets under management but less expensive costs and a much better return over the past year. The SPDR uses more of an equal-weight approach, using solely biotech stocks and not limiting exposure to stocks that trade on any one particular exchange. Assets are split across just over 100 different stocks, but the largest position in the portfolio has just a 2.2% allocation currently. With smaller biotechs having seen some incredible performance over the past year, it's not surprising to see the SPDR outperforming its iShares counterpart.

How smaller biotech ETFs are fighting hard

Competing biotech ETFs are working to gain traction, using different strategies to gain attention. The First Trust biotech ETF has just 30 holdings, with an index that concentrates on what the ETF hopes is the best bets in the space. This makes the portfolio largely dependent on small companies for its overall returns, and as we saw with the SPDR, small biotechs made smart bets overall during the past year. Slightly higher expenses are a negative, but for those who think that a more concentrated approach is a better way to play the space, the First Trust ETF will have some appeal.

Finally, the VanEck ETF mixes the strategies of other funds. Its high exposure to the giants of the biotech field makes it look similar to the iShares fund. However, it has a much more concentrated portfolio of stocks, owning just 26 different positions. The top four stocks make up almost 40% of the fund's total assets. A net expense ratio of 0.35% makes it as inexpensive as the SPDR.

Which biotech ETF should you pick?

All four of these biotech ETFs have their advantages and disadvantages. The primary question to ask is whether you want more money allocated to megacap established players in the space or the smaller companies that have more risk but more potential reward. From there, whether you like more concentrated funds or those with more stocks is simply a matter of your tolerance for risk.