Biotech ETFs – Investing in Health Innovation

Introduction to biotech

So, what is biotechnology? Biotechnology is a sector that uses living organisms and the practice of molecular biology to produce healthcare products. Biotechnology is primarily used in medicine and pharmaceuticals; however, it also has use cases in genomics, food production, and biofuel production.

Biotechnology is about finding solutions to problems by understanding how living organisms function at a molecular level. Biotechnology sciences have contributed to many modern advancements, including extending lifespans and improving humans' overall quality of life.

Companies in the biotech space face very high barriers to success since there are incredibly high R&D costs and a low probability of advancing products through the clinical trial process. The R&D timeline may be many years long; therefore, these companies need to raise capital while simultaneously earning essentially zero revenue.

It is important to define the difference between biotech and pharmaceuticals, since many investors may use them interchangeably. There is a significant difference in that biotech companies focus on developing medicines using living organisms. In contrast, pharmaceutical companies focus on developing medicine using chemical processes. Biotech companies are often seen as riskier due to the longer R&D timelines and lower probability of product success. 

Value proposition of biotech ETFs

A biotech ETF focuses on companies that combine biology and technology to develop various products and services. With an ETF, investors can gain diversified exposure to biotech companies with greater transparency, lower overall costs, and higher liquidity.

Since biotech companies, on an individual basis, face high risks of failure. The ability to group the risk of multiple biotech companies can reduce the idiosyncratic risk faced by investors. Investors, through investing in ETFs, may gain exposure to numerous biotech companies in a single trade.

Furthermore, investors can gain exposure to a broader variety of biotechnologies such as DNA technology, molecular biology, genetic engineering, and other sub-fields. 

Lastly, investors can gain exposure to different biotech companies in various stages of the clinical trials, therefore varying the risk exposures of the individual held securities.

Biotech ETFs: Examples

Some examples of the most highly liquid biotech ETFs that investors may consider investing in are:

IBB (iShares Biotechnology ETF)

AUM: $8.3B

Expense Ratio: 0.45%

YTD performance: -17.0%

XBI (SPDR S&P Biotech ETF)

AUM: $7.8B

Expense Ratio: 0.35%

YTD performance: -24.5%

ARKG (ARK Genomic Revolution ETF)

AUM: $2.9B

Expense Ratio: 0.75%

YTD performance: -38.9%

FBT (First Trust NYSE Arca Biotechnology Index Fund ETF)

AUM: $1.4B

Expense Ratio: 0.55%

YTD performance: -11.2%

Data for this article is as of July 11th, 2022.