Biotech stocks face volatility but boast long-term potential. In 2020, it was the year for growth-oriented health care names as the world came to grips with coronavirus and hungered for potential treatments. But in 2021, as the pandemic matured and as some of the COVID-related successes were priced in, we saw many areas take a step back – including the once-popular sector of biotechnology.
In fact, over the last 12 months many leading biotech stocks are significantly in the red even though the broader S&P 500 has moved 22% higher. But as the old saying goes, investors make the most when they buy low and sell high. And some traders are starting to eye this pullback in biotech as a buying opportunity considering its long-term potential. If you’re bullish on the sector despite recent challenges in late 2021 and early 2022, here are some of the best biotech ETFs to buy.
iShares Biotechnology ETF (ticker: IBB)
The leading biotech ETF by assets, IBB has nearly $10 billion under management and is one of the most established ways to get exposure to the high-growth corner of health care. It also averages more than 2 million shares traded on any given day, making it a popular and liquid vehicle in what can sometimes be a volatile sector.
Top holdings among its roughly 370 positions at present include Amgen Inc. (AMGN) and Gilead Sciences Inc. (GILD). But buyer beware: These aren’t exactly small upstarts, as the pair is collectively worth nearly $200 billion in market value – and makes up more than 18% of the entire IBB portfolio between them. But for investors looking to play the bigger names in biotech, that may not be too much of a knock against this top iShares fund.
SPDR S&P Biotech ETF (XBI)
The second-place biotech fund at present, with about $6 billion in assets, is this SPDR fund. While it is similarly focused on gene-editing companies, development-stage drugmakers and high-tech diagnostic firms, it differs significantly from IBB in its structure. Specifically, it has a smaller list of stocks at a lineup of only about 200 components.
What’s more, XBI aims to be “equal weight” with regular rebalancing to ensure no single stock has too big or too small a stake. That means you’ll find lesser-known biotech stocks like $5 billion gastroenterology specialist Arena Pharmaceuticals Inc. (ARNA) and $3 billion oncology firm PTC Therapeutics Inc. (PTCT) side by side with the big boys to provide true exposure to the entire sector.
ARK Genomic Revolution ETF (ARKG)
Differing from the prior two funds is ARKG, a roughly $5 billion actively managed ETF that’s designed to hold 50 or fewer holdings based on a unique set of internal metrics. In theory, this puts the cash behind the biggest opportunities – at least, based on the screening methodology designed by this biotech ETF’s managers, led by the famed investor Cathie Wood.
Right now the top single position is DNA screening test specialist Exact Sciences Corp. (EXAS), with a 7% weighting, followed by remote health care play Teladoc Health Inc. (TDOC). Of course, it’s also worth noting that these picks haven’t done all that well lately, and as a result ARKG is sitting on a 12-month loss of more than 50%. However, if you’re bullish long-term and want to trust management at this popular fund, this could be a bargain opportunity to stake out a position in this biotech ETF.
First Trust NYSE Arca Biotechnology ETF (FBT)
Another fund focused on a short list of high-octane biotechs is this nearly $2 billion First Trust offering that only holds a mere 30 total positions. No single holding tops 5%, however, so the cash is spread around this list pretty equally. Top holdings at present include $3 billion neurological treatment specialist Acadia Pharmaceuticals Inc.
(ACAD) and $1 billion biotech FibroGen Inc. (FGEN), which focuses on various rare organ disorders. FBT has been very volatile lately, however its 17% loss over the last 12 months is actually much better than some of its peer biotech ETFs on this list. That shows this First Trust offering can find profits even in a troubled market through a focused list of high-quality components.
iShares Genomics Immunology and Healthcare ETF (IDNA)
We’re now out of the billion-dollar biotech ETFs and into the smaller and more boutique offerings. This IDNA ETF from iShares is a good example of this, as the biotech ETF offers a focused fund with only 50 total components and a specific focus on “innovation in genomics, immunology and bioengineering.”
Right now that includes stocks like European megacap drugmaker Sanofi (SNY) as well as $5 billion oncology biotech Exelixis Inc. (EXEL). Though the strategy is narrow, the list of holdings is pretty diverse within this corner of the market. And though smaller, IDNA does enjoy $300 million in assets so it does have a decent amount of support across Wall Street.
Invesco Dynamic BioTech & Genome ETF (PBE)
A roughly $200 million biotech ETF, this Invesco fund is another tactical play on a subset of stocks in the sector – this time, involving gene-editing and DNA-related capabilities. That includes big biotech names like the $60 billion Regeneron Pharmaceuticals Inc.
(REGN) as well as smaller up-and-comers like Ireland-based “orphan drug” researcher Alkermes PLC (ALKS). Though shares have been volatile, a decline of 20% over the last 12 months puts this smaller biotech ETF ahead of many of its larger peers, and that may make it worth a look in 2022 as a result of this resilience.
Direxion Daily S&P Biotech Bull 3X Shares ETF (LABU)
No discussion of fast-moving biotech ETFs would be complete without the fastest-moving fund of them all – this “leveraged” offering from Direxion aims to deliver 300% of the daily returns of the S&P Biotechnology Select Industry Index. That’s great news when times are good, like when this ETF nearly tripled from its late 2020 lows to a high that briefly crested $185 in early 2021.
However, it’s worth noting this biotech ETF sits in the low $20 range at present for a gut-wrenching decline of almost 90% from its 52-week high. If you’re not afraid of the big risks and want to bet on biotech, LABU may have a limited role in your portfolio. But considering the current momentum is to the downside, investors may want to tread very carefully here.
Here are the seven best biotech ETFs to buy:
- iShares Biotechnology ETF (IBB)
- SPDR S&P Biotech ETF (XBI)
- ARK Genomic Revolution ETF (ARKG)
- First Trust NYSE Arca Biotechnology ETF (FBT)
- iShares Genomics Immunology and Healthcare ETF (IDNA)
- Invesco Dynamic BioTech & Genome ETF (PBE)
- Direxion Daily S&P Biotech Bull 3X Shares ETF (LABU)
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