What Is an Exchange-Traded Fund (ETF)?
An ETF is a bundle of different types of investments sold together as a single entity. Shares are divided up by the total assets of the exchange, which are traded on major stock exchanges.
What Are the Benefits of an ETF?
ETFs give many investors access to types of investments they might not have otherwise been able to trade. Because they represent a diverse portfolio, they often perform better on benchmarks. They are an efficient way to own a diverse and broad focus portfolio as well.
Trading Biotech Sector ETFs
If you want to trade biotech stocks, listen up because there are cost-effective ways to gain exposure to the industry. The right ETF may be a good way to break into healthcare biotech ETF and big pharma.
Now, there’s one thing to understand when trading biotech stocks: They’re volatile. You see, biotech stocks are affected by catalysts, such as U.S. Food and Drug Administration (FDA) approvals, and clinical trial data. That said, if you just purchase one biotech stock, and don’t conduct your due diligence…it could be detrimental to your account. However, if you want to diversify your holdings, you could look at ETFs tracking biotech stocks.
Top 3 ETFs to Track Biotech Stocks
There are plenty of exchange-traded funds out there to track biotech stocks. However, I’ve narrowed it down to the three best biotech ETF funds by total assets. When you’re trading ETFs, you need to keep in mind the total assets and the average daily volume. Additionally, you would want to be wary of the type of exchange-traded product (ETP) being offered. For example, is the ETP categorized as leveraged or inverse?
Tracking Traditional Biotech ETFs
We’re going to be focused on traditional biotech ETFs – those that are not inverse or leveraged – aimed at tracking specific indices.
That said, let’s look at one of the largest ETFs by total asset holdings.
iShares Nasdaq Biotechnology ETF (IBB)
The iShares Nasdaq Biotechnology ETF has net assets of over $8B, and is fairly liquid – trading over 2M shares a day. That said, many traders look to this ETF to track biotech stocks. IBB provides targeted exposure to both U.S. pharmaceutical and biotech stocks. The fund is able to do so by tracking the performance of the Nasdaq Biotechnology Index, its underlying, or benchmark, index.
Here’s a look at IBB’s top 10 holdings:
Keep in mind, biotech exchange-traded funds are considered high beta. For example, IBB has an equity beta of 1.88, when compared to the S&P 500 Index. That means, theoretically, this fund will move in the same direction as the market, but with a higher magnitude. If SPY moves up 1%, then theoretically, based on beta, IBB would move 1.88%.
Moreover, biotech exchange-traded funds are considered to be volatile. For example, IBB has an average annual standard deviation, or volatility, of 23.08% over the past three years. That in mind, IBB is not for the faint of heart.
SPDR S&P Biotech ETF (XBI)
Although the SPDR S&P Biotech ETF (XBI) does not have as much in net assets when compared to IBB, XBI is a tad more liquid, trading on average around 3.8M shares a day. Unlike IBB, XBI tracks the total return performance of the S&P Biotechnology Select Industry Index.
Here’s a look at the fund’s top 10 holdings:
If you compare these holdings to those of IBB, you’ll notice a large discrepancy. You see, XBI tracks an index that is equal-weighted. That means it does not base it’s holding percentages using market capitalizations. While IBB will hold a larger percentage of a biotech stock depending on its market capitalization.
Now, XBI has a beta of 1.70 when compared to the S&P 500 Index. That means it’s theoretically 70% more volatile than the S&P 500 Index. XBI has an average annual standard deviation of 31.64% over the past three years. Consequently, this ETF may be more “volatile” than IBB, based on the average annual volatility.
However, holding either IBB or XBI beats putting a bulk of your capital into one biotech stock.
Moving on, there’s theFirst Trust NYSE Arca Biotechnology Index Fund (FBT).
First Trust NYSE Arca Biotechnology Index Fund (FBT)
With just over $2.50B in total net assets, FBT takes third place for largest biotech ETF. Now, FBT is not as diversified as XBI or IBB, since it only has 30 holdings. On the other hand, XBI holds 120 stocks, while IBB has 224 holdings. That said, FBT provides a very concentrated basket of biotech stocks.
FBT aims to replicate the general price and yield performance of the NYSE Arca Biotechnology Index, the fund’s benchmark. Now, the benchmark index is an equal-dollar weighted index providing exposure to biotech stocks involved in the use of biological processes to develop products or services. What that means is the fund will invest an equal amount of capital per position. Keep in mind, they may not be exactly the same dollar amount.
Now these companies include those engaged in recombinant DNA technology, genetic engineering, molecular biology, and genomic, just to list a few.
Moving on, let’s take a look at some of FBT’s stats.
FBT is not as liquid as XBI or IBB, and only trades just around 250K shares per day. Consequently, FBT’s bid-ask spreads may not be as tight as those of XBI and IBB. That in mind, this ETF is best suited for more experienced traders and investors.
Here’s a look at the First Trust NYSE Arca Biotechnology Index Fund’s top 10 holdings:
Notice how these top holdings differ from XBI’s and IBB’s top holdings. Moreover, since the portfolio is not as diversified as the previous biotech ETFs, FBT could potentially be dragged down if one of the top holdings reports a negative catalyst.
FBT has an average annual volatility of 26.65%, which indicates it could be slightly more volatile than IBB, but not as volatile as XBI. Moreover, FBT has a beta of 1.89, indicating it’s more volatile than the S&P 500 Index, and generally trades in the same direction as the index.
Final Thoughts on the Best Biotech ETFs
What if you’ve read through all this and aren’t interested in biotech ETFs? Well, here’s a fun fact about traders… we love volatility. You see, biotech stocks are among one of the most volatile sectors. That said, this sector could offer a wealth of opportunities. Heck, this sector allowed me to turn around $15K into over $3M over the past couple of years. Now, if you want to learn more about my trading process and how to trade biotech stocks, check out this webinar here.