Biotech companies use or modify biological processes in order to create new pharmaceuticals or therapies. The biotech sector is particularly closely followed right now, as biotech companies around the world work diligently to develop potential vaccines for COVID-19. Some of the most prominent biotech companies include Vertex Pharmaceuticals Inc. (VRTX) and Regeneron Pharmaceuticals Inc. (REGN).

Investing in the biotech sector can be daunting. The scientific and regulatory issues involved with gaining approval from the U.S. Food and Drug Administration (FDA) can be substantial, making it risky and difficult to predict what biotech stocks will outperform. One of the easiest ways to invest in the sector is through exchange-traded funds (ETFs). These funds have holdings in a large array of biotech companies, offering investors a well-diversified portfolio in one easy-to-execute trade.

Key Takeaways

  • The biotech sector outperformed the broader market over the past year.
  • The ETFs with the best 1-year trailing total return are ARKG, IDNA, and BTEC.
  • The top holdings of these ETFs are Invitae, Mirati Therapeutics, and Moderna, respectively.

The biotech ETF universe is comprised of about 10 distinct ETFs, excluding inverse and leveraged ETFs, as well as funds with less than $50 million in assets under management (AUM). The biotech sector, as measured by the iShares Nasdaq Biotechnology ETF (IBB), has outperformed the broader market with a total return of 29.9% over the past 12 months compared to the S&P 500's total return of 19.1%. The best-performing biotech ETF for Q4 2020, based on performance over the past year, is the ARK Genomic Revolution ETF (ARKG). We examine the top 3 best biotech ETFs below. All numbers in this story are as of August 18, 2020.

ARK Genomic Revolution ETF (ARKG)

  • Performance over 1-Year: 100.0%
  • Expense Ratio: 0.75%
  • Annual Dividend Yield: 3.60%
  • 3-Month Average Daily Volume: 727,520
  • Assets Under Management: $1.9 billion
  • Inception Date: October 31, 2014
  • Issuer: ARK Investment Management

ARKG is an actively-managed ETF that seeks to invest in companies with significant potential to profit from technological and scientific advancements in gene-editing, genetic therapy, molecular diagnostics, and stem cell advances. The multi-cap fund invests in biotech stocks with various market capitalizations but is tilted towards smaller firms. Its holdings are focused on the U.S. biotech companies with strong growth potential. Its top three holdings include Invitae Corp. (NVTA), a medical genetics company; CRISPR Therapeutics AG (CRSP), a Switzerland-based gene-editing medical company; and Arcturus Therapeutics Holdings Inc. (ARCT), a biotech firm focused on developing therapeutics for rare diseases.

iShares Genomics Immunology and Healthcare ETF (IDNA)

  • Performance over 1-Year: 45.6%
  • Expense Ratio: 0.47%
  • Annual Dividend Yield: 0.86%
  • 3-Month Average Daily Volume: 74,834
  • Assets Under Management: $155.0 million
  • Inception Date: June 11, 2019
  • Issuer: iShares

IDNA tracks the NYSE FactSet Global Genomics and Immuno Biopharma Index, which is composed of companies with the potential to benefit from the long-term growth and innovation in genomics, immunology, and bioengineering. The multi-cap ETF invests in biotech companies with a range of market capitalizations. The fund follows a blended strategy, holding stocks with both growth and value characteristics. Its top three holdings include Mirati Therapeutics Inc. (MRTX), a clinical-stage oncology company; Genmab A/S (GMAB), a Denmark-based biotech company that develops therapeutics for the treatment of cancer and other diseases; and Moderna Inc. (MRNA), a biotech company focused on developing vaccine technology based on messenger RNA.

Principal Healthcare Innovators Index ETF (BTEC)

  • Performance over 1-Year: 39.0%
  • Expense Ratio: 0.42%
  • Annual Dividend Yield: N/A
  • 3-Month Average Daily Volume: 13,780
  • Assets Under Management: $102.8 million
  • Inception Date: August 19, 2016
  • Issuer: Principal Financial Group

BTEC tracks the NASDAQ U.S. Health Care Innovators Index, which provides exposure to non-mega-cap U.S. healthcare companies listed on the Nasdaq U.S. Benchmark Index. The ETF invests in companies with various market capitalizations but seeks to avoid large-cap and less liquid names. The fund follows a growth strategy, focused on companies that are researching and developing innovative medicines, therapies, equipment, and facilities. Its top three holdings include Moderna; Biomarin Pharmaceutical Inc. (BMRN), a biotech company that develops therapies for people with serious rare diseases and medical conditions; and Seattle Genetics Inc. (SGEN), a biotech company that develops antibody-based therapies for the treatment of cancer.