Many investors want to gain exposure to the red-hot biotech sector. One of the easiest ways to invest in biotech is through exchange-traded funds (ETFs). These funds have holdings in a large array of biotech companies, providing a well-diversified portfolio in one easy-to-execute trade.
Investing in the biotech sector can be daunting. The unique scientific and regulatory issues with the U.S. Food and Drug Administration (FDA) are more complex than in other sectors. ETFs provide an ideal method to invest in the sector without having to do due diligence on each individual company.
SPDR S&P Biotech
The SPDR S&P Biotech ETF (NYSEARCA: XBI) tracks the results of the S&P Biotechnology Select Industry Index. The fund was formed in 2006, with SSGA Funds Management, Inc. as the investment manager. Shares trade on the New York Stock Exchange (NYSE). The fund had 105 holdings and net assets of $3.14 billion as of July 2015.
XBI has a modified equal weighting scheme that provides exposure to smaller biotech companies. These smaller biotech companies have great potential for growth, but also significant risk. The risk is spread out among a large number of holdings.
The fund has a reasonable gross expense ratio of 0.35%, which is the lowest in the sector. XBI has performed well recently, up over 65% from 2014 to 2015. The biotech sector has appreciated greatly, although some have wondered whether there is a biotech bubble. The fund is suitable for investors who want a longer-term investment with greater exposure to smaller biotech companies than that offered by other ETFs in the sector.
iShares Nasdaq Biotech
The iShares Nasdaq Biotech ETF (Nasdaq: IBB) is the largest biotech ETF, with around $9.9 billion in assets under management (AUM) as of July 2015. IBB provides exposure to biotech and pharmaceutical companies and tracks a market capitalization-weighted index of companies listed on the Nasdaq exchange. IBB began trading in 2001 and has a slightly higher expense ratio of 0.48%.
The iShares Nasdaq Biotech ETF favors larger biotech companies because of its market-cap weighting scheme. The top three holdings, with over an 8% weighting each, are Gilead Sciences (Nasdaq: GILD), Biogen, Inc. (Nasdaq: BIIB) and Celgene Corp. (Nasdaq: CELG). The top 10 holdings in the fund have a weighting of around 58%.
IBB has performed well over the past year, up over 43% since June 2014. This performance is similar to other funds in the sector. The fund has very good liquidity with an average daily trading dollar volume of $577 million. Thus, it is easy for investors to build and exit positions. However, the fund can only hold stocks that are trading on the Nasdaq. There are a number of smaller biotech companies with good potential that trade on the NYSE, and the fund may miss out on this important subsector. Still, the fund provides a solid vehicle for long-term investment in the biotech sector that is weighted towards larger-cap companies.
ProShares Ultra Nasdaq Biotech
The ProShares Ultra Nasdaq Biotech (Nasdaq: BIB) seeks daily returns that are twice that of the Nasdaq Biotech Index. It is a leveraged ETF. The fund began trading in 2010. The fund has a very high expense ratio of 1.08%. This increased expense is because of increased management expenses. The fund must enter into swap agreements with counterparties to rebalance holdings on a daily basis to provide the leveraged performance. The fund has had spectacular performance recently, up over 94% over the past year.
The ProShares Ultra Nasdaq Biotech fund is geared towards shorter-term holding periods for more active traders. The high expense ratio and the greater level of risk may not be appropriate for most long-term investors.