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 underperformed the broader market over the past year.
  • The ETFs with the best 1-year trailing total return are ARKG, BTEC, and GNOM.
  • The top holdings of these ETFs are Teladoc Health Inc., Seagen Inc., and Natera 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 10 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 significantly underperformed the broader market with a total return of 21.3% over the past 12 months compared to the S&P 500's total return of 49.0%, as of May 4, 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 May 6, 2021.

ARK Genomic Revolution ETF (ARKG)

  • Performance over 1-Year: 99.0%
  • Expense Ratio: 0.75%
  • Annual Dividend Yield: 0.95%
  • 3-Month Average Daily Volume: 4,511,957
  • Assets Under Management: $8.9 billion
  • Inception Date: Oct. 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 holds approximately 60 growth stocks of various market capitalizations. The fund's top three holdings include Teladoc Health Inc. (TDOC), a provider of tele-healthcare services; Regeneron Pharmaceuticals Inc., a biotechnology pharmaceuticals company; and Exact Sciences Corp. (EXAS), a molecular diagnostics company.

Principal Healthcare Innovators Index ETF (BTEC)

  • Performance over 1-Year: 40.6%
  • Expense Ratio: 0.42%
  • Annual Dividend Yield: 0.38%
  • 3-Month Average Daily Volume: 21,295
  • Assets Under Management: $163.7 million
  • Inception Date: Aug. 19, 2016
  • Issuer: Principal Financial Group

BTEC tracks the Nasdaq US Health Care Innovators Index, which is comprised of early stage health care companies. The fund targets companies with potential for innovation in the areas of medicine, facilities, therapies, and equipment. BTEC has a lower expense ratio than many other biotechnology ETFs but also has lower AUM than many of its peers, so it often trades at wider spreads than other funds in the space. The diversified fund holds 304 stocks, with the top 10 holdings making up under a quarter of total assets invested. The top holdings for BTEC include Seagen Inc. (SGEN), a biotechnology company developing treatments for cancer; Exact Sciences Corp.; and Teladoc Health Inc.

Global X Genomics & Biotechnology ETF (GNOM)

  • Performance over 1-Year: 40.6%
  • Expense Ratio: 0.50%
  • Annual Dividend Yield: 0.15%
  • 3-Month Average Daily Volume: 158,911
  • Assets Under Management: $205.9 million
  • Inception Date: April 5, 2019
  • Issuer: Global X

GNOM tracks the Solactive Genomics Index, which targets companies involved in gene editing, genomic sequencing, genetic medicine/therapy, computational genomics, and biotechnology. The fund holds approximately 40 stocks of various market capitalizations, with the top 10 holdings accounting for 43.1% of invested assets. The top holdings for GNOM include Natera Inc. (NTRA), a clinical gene testing company; Pacific Biosciences of California Inc. (PACB), a maker of gene sequencing tools; and Agilent Technologies Inc. (A), a developer and manufacturer of analytical instruments.

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