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 a number of biotech companies around the world rush to develop potential vaccines for COVID-19. Some of the most prominent biotech companies include Vertex Pharmaceuticals Inc. (VRTX) and Regeneron Pharmaceuticals Inc. (REGN).

Key Takeaways

  • The biotech sector significantly outperformed the broader market over the past year.
  • The ETFs with the best 1-year trailing total return are ARKG, IDNA, and XBI.
  • The top holdings of these ETFs are Teladoc Health Inc., Fate Therapeutics Inc., and Vir Biotechnology Inc., respectively.

Investing in the biotech sector can be risky. 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 biotech 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.

There are 12 biotech ETFs that trade in the U.S., 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 Nasdaq Biotechnology Index, has outperformed the broader market with a total return of 44.0% over the past 12 months compared to the S&P 500's total return of 19.1%, as of February 1, 2021. The best-performing biotech ETF, 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 below are as of February 2, 2021.

ARK Genomic Revolution ETF (ARKG)

  • Performance over 1-Year: 222.7%
  • Expense Ratio: 0.75%
  • Annual Dividend Yield: 0.77%
  • 3-Month Average Daily Volume: 4,255,098
  • Assets Under Management: $11.6 billion
  • Inception Date: October 31, 2014
  • Issuer: ARK Investment Management

ARKG is an actively-managed ETF focused on investing in companies expected to benefit from technologies and scientific developments in genomics that could enhance the quality of human and other life. It provides exposure to companies engaged in gene editing, therapeutics, stem cells, and bioinformatics. The fund typically holds between 30-50 growth stocks of various market capitalizations. The fund's top three holdings include Teladoc Health Inc. (TDOC), a provider of tele-healthcare services; Twist Bioscience Corp. (TWST), a developer of synthetic DNA manufacturing processes; and Pacific Biosciences of California Inc. (PACB), a developer and manufacturer of systems for genetic analysis.

iShares Genomics Immunology and Healthcare ETF (IDNA)

  • Performance over 1-Year: 85.9%
  • Expense Ratio: 0.47%
  • Annual Dividend Yield: 0.24%
  • 3-Month Average Daily Volume: 75,760
  • Assets Under Management: $264.1 million
  • Inception Date: June 11, 2019
  • Issuer: iShares

IDNA tracks the NYSE FactSet Global Genomics and Immuno Biopharma Index, which is composed of companies across the world that are poised to benefit from the long-term growth and innovation in genomics, immunology, and bioengineering. The ETF provides exposure to global stocks across the value chain of genomics, immunotherapy, and healthcare industries. The fund follows a blended strategy, investing in both growth and value stocks of various market caps. It is comprised of 50 holdings. Its top three holdings include Fate Therapeutics Inc. (FATE), a developer of programmed cellular immunotherapies for cancer and immune disorders; BeiGene Ltd. (6160:HKG), a China-based developer of molecularly targeted and immuno-oncology drugs for cancer; and Exelixis Inc. (EXEL), a developer of new medicines for cancer treatment.

SPDR S&P Biotech ETF (XBI)

  • Performance over 1-Year: 79.5%
  • Expense Ratio: 0.35%
  • Annual Dividend Yield: 0.18%
  • 3-Month Average Daily Volume: 5,085,092
  • Assets Under Management: $7.9 billion
  • Inception Date: February 6, 2006
  • Issuer: State Street SPDR

XBI tracks the S&P Biotechnology Select Industry Index, which gauges the performance of the biotechnology sub-industry portion of the S&P Total Markets Index. The ETF provides exposure to mostly small- and mid-cap growth companies within the U.S. biotechnology sector. It is comprised of 170 stocks. Because of its narrow focus, XBI is probably not best-suited for investors looking to construct a long-term portfolio. But for investors looking to fine tune their portfolio or are especially bullish on the sector, it is worth considering. The fund's top three holdings include Vir Biotechnology Inc. (VIR), a clinical-stage immunology company developing treatments for serious infectious diseases; Ligand Pharmaceuticals Inc. (LGND), a developer of technologies that help pharmaceutical companies discover and develop medicines; and Novavax Inc. (NVAX), a developer of recombinant vaccines.

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