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. Apparently promising treatment candidates often fail, and most investors lack the scientific background necessary to make an informed assessment of the merits of a company’s technology platform or the medications it has in development.
So, for those seeking to profit from the biotech industry’s long-term growth — which by all indications is just getting started — buying exchange-traded funds (ETFs) rather than individual stocks can be a solid strategy. These ETFs own a bucket of stocks across the industry, so while the stunning success of any individual company won’t have a huge impact on your investment returns, the failure of another won’t take a major bite out of them, either.
There’s an array of biotech ETF options available to investors, each with its own thematic focuses and risk profile, but I favor these three for a simple, compelling reason: They have histories of outperforming the market.
1. SPDR S&P Biotech ETF
With $7.54 billion in net assets, the SPDR S&P Biotech ETF (NYSEMKT:XBI) has been one of the industry’s largest since its inception in 2006. It holds stakes in rising stars like Moderna as well as clinical-stage competitors like Humanigen and Vaxart. Overall, the fund is focused on small-cap biotechs that are primed for potential massive growth at some point in the future, so don’t expect to find many profitable or entrenched companies on its roster.
The SPDR S&P Biotech ETF turns over 66% of its holdings every year, which ensures that investors continue to have exposure to potential winners, and all its stocks are picked from the S&P Biotechnology Select Industry Index. In terms of costs, its expense ratio of 0.35% is lower than the biotech ETF category’s average of about 0.5%, but not by much. And, in comparison to the S&P 500, its 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. But if you’d prefer to focus your investment on companies pursuing a specific therapy development area, it’s far too diversified.
2. Global X Genomics and Biotechnology ETF
Established in April of 2019, the Global X Genomics and Biotechnology ETF (NASDAQ:GNOM) is on the smaller side among biotech ETFs with a scant $215.94 million in net assets. As the name suggests, its investment focus is on companies that stand to benefit from breakthroughs and new technologies in genomics. Its holdings include profitable gene-sequencing giants like Illumina as well as biotechs like Intellia Therapeutics, a formidable company even if it doesn’t yet have an approved product on the market. Shares of these businesses aren’t as likely to double in a day as a result of good news from a clinical trial, but they’re also less likely to collapse under the opposite conditions.
Given that it includes a mix of companies at different phases of maturity, the stocks held by this ETF tend to be mid caps rather than small caps. Its expense ratio of 0.5% is about average, but that won’t ruin your returns. Its lack of any dividend yield is a downside, but the ETF has still beaten the market over its existence so far.
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 progress in bioengineering, genomics, and immunology. Created in June of 2019, it holds stocks like Moderna and BioNTech, as well as pharmaceutical giants like Gilead Sciences and Sanofi. Most of its largest holdings are mature companies with at least one source of recurring revenue, so expect earnings seasons to be the most common catalysts for notable share price moves.
In theory, investors in this ETF are exposed to a steady rate of growth that’s less risky than the biotech industry’s norm. Its $290.71 million in net assets make it on the smaller side, and its expense ratio of 0.47% is about average. While this ETF’s dividend yield of 0.26% is higher than any of the others I’ve discussed today, it probably shouldn’t be a focus for investors.
One thing that differentiates this ETF from the other two I’ve mentioned is that it has a broader representation of international stocks. As a result, it’s less exposed to risks from changes to national regulations concerning the drug development process or drug pricing, as those risks tend to be confined to individual markets.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.