Biotechnology is a highly volatile and potentially highly profitable industry sector. Here we’ll look at the best biotech ETFs for 2021.
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Introduction – Why Biotech Stocks?
Biotech is an industry sub-sector within the larger health care sector of the market. The industry is an applied science, using organic material to produce products, processes, and services related to mitigating disease, increasing crop yields, synthesizing biofuels, developing novel drug treatments, genomics, and more. The biotech sector has taken off considerably since the early 1990s. With the recent emergence of bioinformatics, new biotech startups are popping up in Silicon Valley, truly combining biology and tech. Understandably, biotech companies are almost entirely growth stocks, reinvesting and revenues and capital into R&D, so dividends are rare.
Inherent to the biotechnology sector are long lead times, high R&D costs, and the subsequent potential for large swings, both up and down. As with pharmaceutical companies, earnings and success can hinge entirely on FDA approvals and headlines, resulting in high volatility for the sector. This makes biotech stocks extremely popular among day traders. Simultaneously, sometimes it’s a waiting game, as product development and clinical trials can take years, during which time companies can be unprofitable and unstable, before a promising stock finally takes off (or fails). Biotech stocks can be particularly binary in that regard. A small-cap biotech stock working on one single drug can grow in value by millions literally overnight, as these companies live and die by FDA announcements.
Adding to the unpredictable nature of the biotech sector is the fact that it’s virtually impossible for the average investor to adequately understand and evaluate a biotech company’s product or service (and the risk thereof), as the technology, application, and development process are all usually extremely complex. Most investors in biotech diversify across the sector with multiple companies, such as with the ETFs below, with the hope that there will be more winners than losers. Fortunately, this has indeed been the case for the sector as a whole, with incredible gains outweighing losses, causing the sector to soar in recent years, far outpacing the broader market:
The financial success – and subsequent stock behavior – of many of these companies hinges heavily on clinical trial outcomes, patents, and FDA approvals. Like consumer staples, the health care sector is considered non-cyclical, and thus can be a smart defensive equities play. Below are the best health care ETFs to get exposure to these stocks.
The 3 Best Biotech ETFs
Below are the 3 best biotech ETFs:
IBB – iShares Nasdaq Biotechnology ETF
The iShares Nasdaq Biotechnology ETF (IBB) is the most popular fund for this narrow sub-sector, allowing investors to specifically target U.S. biotech and pharmaceutical companies listed on the NASDAQ exchange. This ETF is highly liquid for such a narrow industry target. The fund is market cap weighted and seeks to track the NASDAQ Biotechnology Index. IBB is heavily weighted toward the United States at roughly 95%, but does provide a small amount of international diversification. This ETF has 209 holdings and an expense ratio of 0.46%.
XBI – SPDR S&P Biotech ETF
The SPDR S&P Biotech ETF (XBI) is another broad biotech fund, but is very different from IBB above. This fund seeks to track the S&P Biotechnology Select Industry Index, an equal-weighted index of mostly small- and mid-cap stocks in the United States. Consequently, investors should expect greater volatility with XBI than with IBB. Equal weighting is an attractive attribute in this context, as it reduces single company risk in a sector of highly volatile stocks. This ETF has an expense ratio of 0.35%.
ARKG – ARK Genomic Revolution ETF
The ARK Genomic Revolution ETF is an actively managed fund from ARK Funds that focuses specifically on genomics. Think gene editing, gene therapy, stem cells, etc. The fund is mostly tilted to U.S. small-cap biotech stocks. The portfolio manager Catherine Wood and her team have definitely earned the ETF’s expense ratio of 0.75% with the fund’s stellar performance since inception, which has been responsible for the fund’s meteoric rise in popularity; it has over $2 billion in assets under management. The fund typically holds between 30 and 50 companies.
Where to Buy These Biotech ETFs
M1 Finance offers all these biotech ETFs. The broker has zero trade commissions and zero account fees, and offers fractional shares, dynamic rebalancing, and a modern, user-friendly interface and mobile app. I wrote a comprehensive review of M1 Finance here.
Disclaimer: While I love diving into investing-related data and playing around with backtests, I am in no way a certified expert. I have no formal financial education. I am not a financial advisor, portfolio manager, or accountant. This is not financial advice, investing advice, or tax advice. The information on this website is for informational and recreational purposes only. Investment products discussed (ETFs, mutual funds, etc.) are for illustrative purposes only. It is not a recommendation to buy, sell, or otherwise transact in any of the products mentioned. Do your own due diligence. Past performance does not guarantee future returns. Read my lengthier disclaimer here.