Between the unpredictable twists and turns of the clinical trial process and the endless mysteries of human health, investing in biotech stocks is quite risky. Treatment candidates that appear promising often fail, and most investors lack the science to properly assess the merits of a company’s technology platform or drugs under development.
So, for those looking to benefit from the long-term growth of the biotech industry – which is apparently just beginning – buy Exchange Traded Funds (ETFs) Instead of individual stocks can be a solid strategy. These ETFs own an abundance of stocks across the industry. So while the overwhelming success of one company won’t have a huge impact on your investment returns, the failure of another won’t take much of a bite out of you either.
There are a number of biotech ETF options available to investors, each with their own thematic focus and risk profile, but I prefer these three for one simple, compelling reason: They have historically outperformed the market.
1. SPDR S&P Biotech ETF
With a net worth of $ 7.54 billion SPDR S&P Biotech ETF (NYSEMKT: XBI) has been one of the largest in the industry since it was founded in 2006. It holds stakes in emerging stars like Modern as well as clinical-stage competitors such as Humane and Vaxart. Overall, the fund focuses on small-cap biotechs that prepared for massive growth at some point in the future, so don’t expect to find many profitable or established companies on its list.
The SPDR S&P Biotech ETF turns over 66% of its holdings each year, ensuring that investors continue to participate in potential winners and all of their stocks from the S&P Biotechnology Select Industry Index. In terms of cost, it is Expense ratio of 0.35% is lower than the biotech ETF category average of around 0.5%, but not by much. And compared to the S&P 500, the dividend yield of 0.25% is quite low. If you’re looking for broad exposure to the biotech industry, this ETF is one of the best options. However, if you prefer to focus your investments on companies pursuing a particular area of therapy development, it is far too diversified.
2. Global X Genomics and Biotechnology ETF
Founded in April 2019, Global X Genomics and Biotechnology ETF (NASDAQ: GNOM) is on the smaller side of biotech ETFs with net worth just under $ 215.94 million. As the name suggests, investment is focused on companies that can benefit from breakthroughs and new technologies in genomics. Its holdings include profitable gene sequencing giants like lighting as well as biotechs like Intellia therapeutics, an impressive company, even if it does not yet have an approved product on the market. These companies’ stocks are unlikely to double in a day based on good news from a clinical trial, but they are also less likely to collapse under the opposite circumstances.
Because this ETF is a mix of companies with different maturities, the stocks held by this ETF are more mid-caps than small-caps. The 0.5% expense ratio is about average, but that won’t ruin your returns. The lack of a dividend yield is a disadvantage, but the ETF has still beaten the market in its existence to date.
3. iShares Genomics, Immunology and Healthcare ETF
The iShares Genomics, Immunology and Healthcare ETF (NYSEMKT: IDNA) invests in companies around the world that could benefit from advances in biotechnology, genomics and immunology. It was founded in June 2019 and holds stocks like Moderna and BioNTech, as well as pharmaceutical giants like Gilead Sciences and Sanofi. Most of his largest holdings are mature companies with at least one source of recurring income. So expect the earnings season to be the most common catalyst for notable stock price movements.
In theory, investors in these ETFs are exposed to a steady growth rate that is less risky than the norm in the biotech industry. With a net worth of $ 290.71 million, it’s a bit smaller and its expense ratio of 0.47% is average. While this ETF’s dividend yield is 0.26% higher than any other I’ve discussed today, it probably shouldn’t be the focus of investors.
One thing that sets this ETF apart from the other two I mentioned is that it has a broader representation of international stocks. As a result, it is less exposed to risks from changes in national regulations on drug development processes or drug pricing, as these risks are typically confined to individual markets.
This article represents the opinion of the author who may disagree with the “official” referral position of a premium advisory service from the Motley Fool. We are colorful! Questioning an investment thesis – even one of our own – helps us all think critically about investing and make decisions that will help us get smarter, happier, and richer.