Final Thoughts on the Best Biotech ETFs
Tech Fund 2 – Information Technology
Source: ShutterstockOf course, sometimes it doesn’t pay to overthink tech. Why not just go withthe big, established names that are proven successes?The folks at Vanguard always deliver low-cost options for investors, and theydo so again with their flagship family of tech funds. The Vanguard InformationTechnology ETF (NYSEARCA:VGT) and Vanguard Information Technology Index FundAdmiral Shares (MUTF:VITAX) mutual fund are great selections for anyportfolio, whether you’re a short-term trader or a long-term investor.This large-cap tech fund focuses on the biggest names on Wall Street,including the FAANG stocks. But instead of relying on one or two picks, youinstead get a share of about 360 big-time players in software, semiconductorsand other technology-related businesses.So which fund is right for you? Well, both have a rock-bottom expense ratio of0.10%, or $10 on every $10,000 invested. But small investors should go withthe ETF, which has no minimum investment requirement. The larger admiralshares mutual fund requires a minimum investment of $100,000 an is bettersuited for institutional investors.
Tech Fund 4 – Biotech
Source: ShutterstockOne of the most powerful trends of 2018 will be the continued demographicshift of America, with aging Baby Boomers reshaping our economy and ourhealthcare system. And the best way to play this trend is via the SPDR S&PBiotech ETF (NYSEARCA:XBI), which covers the companies creating the nextgeneration of blockbuster drugs.Individual biotech stocks can be risky plays, soaring on positive drug trialsor crashing after failure to get an FDA approval, and a diversified fund is agood way to smooth out the ride.I prefer XBI to other biotech funds because it subscribes to a modified equal-weight index that prevents a single holding from representing too much of theportfolio. For instance, right now the largest holding is only 3% of itstotal. Compare that with the popular iShares Nasdaq Biotechnology ETF IBB,+1.02% where the top three holdings represent a whopping 25% of the portfolio.XBI is cheaper to boot, with a gross annual expense ratio of 0.35%, or $35 onevery $10,000 you invest.If you want to play biotech, you want the picks with the greatest potential.And the methodology behind XBI ensures you have more of your assets in small,up-and-coming companies that might break out the most.
Tech Fund 5 – Internet
Source: ShutterstockIf you had to pick one subsector that sums up the power and potential of techstocks, it would be those companies that are pure internet stocks. After all,some software companies and hardware companies have struggled in recent years— with BlackBerry Ltd. (NASDAQ:BBRY) a prime example.That’s why the First Trust Dow Jones Internet Index Fund (NYSEARCA:FDN). Asthe name implies, this fund invests primarily in tech companies that have aninternet focus. And as a result, the top 10 holdings of this ETF include fourof the five aforementioned FAANG stocks.And besides, what better way to play the promise of tech right now than toinvest in a wide group of companies riding the internet to success? FDN holdsa host of powerful and entrenched companies like travel giant Expedia(NASDAQ:EXPE), and even upstart tech companies like small-cap fintech companyBlucora (NASDAQ:BCOR).If you want to grab a little piece of all the big names in tech, thisinternet-focused fund is a great choice.
Tech ETF 6 – Robo Global Robotics ETF
Source: ShutterstockAutomation is an unstoppable force in the 21st century. While some politicianslike to blame NAFTA or China for the loss of manufacturing jobs in the U.S.,the reality is that high-tech production facilities have displaced blue-collarAmerican workers. Nowadays, robots are the go-to employee for manymanufacturers.But rather than moralize about this trend, why not profit from it?That’s what you can do with the Robo Global Robotics & Automation Index ETF(NYSEARCA:ROBO). This ETF is focused on companies that make most of theirrevenue from automation technologies.That includes fast-growing companies like drone manufacturer AeroVironment Inc(NASDAQ:AVAV) as well as entrenched industrial automation companies likeSiemens AG (OTCMKTS:SIEGY).
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 goodway to break into healthcare biotech ETF and big pharma.Now, there’s one thing to understand when trading biotech stocks: They’revolatile. You see, biotech stocks are affected by catalysts, such as U.S. Foodand Drug Administration (FDA) approvals, and clinical trial data. That said,if you just purchase one biotech stock, and don’t conduct your duediligence…it could be detrimental to your account. However, if you want todiversify 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 totalassets. When you’re trading ETFs, you need to keep in mind the total assetsand the average daily volume. Additionally, you would want to be wary of thetype of exchange-traded product (ETP) being offered. For example, is the ETPcategorized as leveraged or inverse?
Tracking Traditional Biotech ETFs
We’re going to be focused on traditional biotech ETFs – those that are notinverse 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 fairlyliquid – trading over 2M shares a day. That said, many traders look to thisETF 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 theperformance 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. Forexample, 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 themarket, 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. Forexample, IBB has an average annual standard deviation, or volatility, of23.08% over the past three years. That in mind, IBB is not for the faint ofheart.
First Trust NYSE Arca Biotechnology Index Fund (FBT)
With just over $2.50B in total net assets, FBT takes third place for largestbiotech ETF. Now, FBT is not as diversified as XBI or IBB, since it only has30 holdings. On the other hand, XBI holds 120 stocks, while IBB has 224holdings. That said, FBT provides a very concentrated basket of biotechstocks.FBT aims to replicate the general price and yield performance of the NYSE ArcaBiotechnology Index, the fund’s benchmark. Now, the benchmark index is anequal-dollar weighted index providing exposure to biotech stocks involved inthe use of biological processes to develop products or services. What thatmeans is the fund will invest an equal amount of capital per position. Keep inmind, 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 sharesper day. Consequently, FBT’s bid-ask spreads may not be as tight as those ofXBI and IBB. That in mind, this ETF is best suited for more experiencedtraders and investors.Here’s a look at the First Trust NYSE Arca Biotechnology Index Fund’s top 10holdings: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 biotechETFs, FBT could potentially be dragged down if one of the top holdings reportsa negative catalyst.FBT has an average annual volatility of 26.65%, which indicates it could beslightly more volatile than IBB, but not as volatile as XBI. Moreover, FBT hasa beta of 1.89, indicating it’s more volatile than the S&P 500 Index, andgenerally 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, biotechstocks are among one of the most volatile sectors. That said, this sectorcould offer a wealth of opportunities. Heck, this sector allowed me to turnaround $15K into over $3M over the past couple of years. Now, if you want tolearn more about my trading process and how to trade biotech stocks, check outthis webinar here.7 Biotech ETFs to Buy Now For Covid-19 And BeyondThe fight against the novel coronavirus sparked serious upside for an array ofhealthcare assets this year, including biotech-focused exchange traded funds.Point in case, the widely followed Nasdaq Biotechnology Index is higher by11.50% year-to-date.Some biotechnology ETFs are performing better than that, partly due to heavierallocations in the likes of Moderna (NASDAQ:MRNA), BioNTech (NASDAQ:BNTX) andInovio Pharmaceuticals (NASDAQ:INO), among other Covid-19 vaccine competitors.Beyond Covid-19, investors are drawn to biotech because this is one of themost innovative corners of the broader healthcare sector, and that innovationfuels big growth. Per Morningstar:> “We project 4.7% annual average sales growth through 2024 (similar to> consensus) for the 18 moatiest pharma and biotech names we cover, as> innovation more than counters generic/biosimilar and branded competitive> threats.”Investors looking to profit from that growth should consider these 7 biotechETFs to buy now for Covid-19 and beyond: * SPDR S&P Biotech ETF (NYSEARCA:XBI) * ARK Genomic Revolution ETF (CBOE:ARKG) * ALPS Medical Breakthroughs ETF (NYSEARCA:SBIO) * Principal Healthcare Innovators Index ETF (NASDAQ:BTEC) * First Trust NYSE Arca Biotechnology Index Fund (NYSEARCA:FBT) * Loncar Cancer Immunotherapy ETF (NASDAQ:CNCR) * ETFMG Treatments, Testing and Advancements ETF (NYSEARCA:GERM)
Biotech ETFs to Buy: SPDR S&P Biotech ETF (XBI)
Source: ShutterstockExpense ratio: 0.35% per year, or $35 on a $10,000 investmentTheSPDR S&P Biotech ETF is one of the legacy funds in the biotech ETFcategory, and one of the largest at that. Up about 15% year-to-date, it’sagain displaying the advantages of its equal-weight methodology, which tiltsthe fund toward smaller and mid-cap stocks. Compare this to the aforementionedNasdaq Biotechnology Index, which is cap-weighted and leans heavily on large-cap stocks.XBI holds 113 stocks with a weighted average market capitalization of $10.33billion, put the fund in mid-cap territory. More relevant to the currentenvironment, XBI is a credible coronavirus play as at least four of its top 10holdings, including Inovio and Moderna, are working on Covid-19 vaccines.Plus, there’s earnings growth to be had here.“In the wake of massive downside growth for the broader market, as shownabove, 2020 earnings growth is projected to remain positive for biotechrelative to the S&P 500 (1% vs. -20.5%) with the 3–5-year outlook nearlydouble the market rate (19% vs. 10%),” according to State Street GlobalAdvisors.
Principal Healthcare Innovators Index ETF (BTEC)
Source: ShutterstockExpense ratio: 0.42% per yearThe Principal Healthcare Innovators Index ETF recently turned four years old.It was toiling in relative anonymity until the coronavirus came around. Now,BTEC ranks as one of this year’s best-performing healthcare ETFs, confirmingit’s meaningful to count Moderna and Teladoc Health (NYSE:TDOC) among its topholdings.BTEC, which tracks the Nasdaq Healthcare Innovators Index, isn’t a dedicatedbiotech ETF, but biotechnology stocks do represent a fair slice of the fund’sportfolio. Rather, as its name implies, BTEC focuses on healthcare innovators,giving it diversity across biotech, healthcare equipment and telemedicinenames, just to name a few.Translation: BTEC is a growth play. Its index methodology allots for earningsinconsistencies while emphasizing research and development-intensivecompanies.Even with that, BTEC isn’t richly valued, trading at just 17.32x earnings.That’s growth at a reasonable price.
First Trust NYSE Arca Biotechnology Index Fund (FBT)
Source: ShutterstockExpense ratio: 0.55% per yearWith $2.17 billion in assets under management, the First Trust NYSE ArcaBiotechnology Index Fund is one of the largest biotech ETFs. It features anequal-weight mix of 30 stocks and is higher by 11.44% year-to-date.That’s an admirable performance considering the fund isn’t heavily allocatedto Covid-19 vaccine developers. FBT doesn’t hold shares of Moderna and itsbiggest coronavirus holding is a just-over 3% allocation to Gilead Sciences(NASDAQ:GILD).Lack of coronavirus vaccine exposure isn’t a knock on FBT though. While it maybe a near-term hurdle of sorts, the fund is levered to other exciting biotechthemes, including genomics, liposome technology and oncology. Additionally,this fund has an extensive history of topping cap-weighted rivals.