The election of Donald Trump to the presidency may have lit a fire under biotech stocks, but the reality is, the sector was one of the best plays for the long haul. And that’s due to one word: innovation.
Biotech drugs continue to be leading the way many pharmaceutical firms develop new products. According to Fidelity Investments, more biotech drugs were approved between 2000 and 2009 than during all of the 1980s and 1990s combined. That drug development has only picked-up speed in recent years.
During 2014, the Food and Drug Administration approved more molecular entities and biotech drugs than any other time in the last 15 years. Today seven of the top ten leading drugs in the world are biotechnology drugs.
Even better, is that Fidelity estimates that trends such as personalized medicine and favorable demographic trends will only spur biotech drug development into the future.
Which means that biotech stocks should be very much on your radar. But given their lotto ticket nature, buying individual biotech stocks is risky business. That’s especially true for entry stage biotech firms. Perhaps the best way to own biotech stocks is to think broad and buy a wide basket of biotech stocks (aka look into biotech exchange-traded funds).
With that in mind, here are three biotech ETFs to buy for the long haul.
Biotech ETFs to Buy: iShares Nasdaq Biotechnology Index (ETF) (IBB)
Expense Ratio: 0.47%, or $47 per $10,000 invested
For investors looking for a core biotech ETF option, the iShares Nasdaq Biotechnology Index (ETF) (NASDAQ:IBB) is still the best game in town. The fund tracks all the biotechnology and pharmaceutical equities listed on the Nasdaq Composite — the dominant place where biotech stocks are found.
That’s currently over 180 different biotech firms. This includes the elder statesmen like Amgen, Inc. (NASDAQ:AMGN) and Gilead Sciences, Inc. (NASDAQ:GILD) as well as upstarts and clinical stage biotech stocks like OvaScience Inc (NASDAQ:OVAS). That diversity provides plenty of coverage in the healthcare sub-sector. You get stability and profits from the bigger biotech stocks with actual drugs and a bunch of growth from the smaller ones.
However, the $8.8 billion IBB takes it one step further compared to other biotech ETFs. IBB also includes many of the life sciences equipment and technology firms.
These companies have been raking in the cash as the “arms merchants” to the drug researchers and have enabled many biotechs to produce their healthcare breakthroughs. While only 7% of the ETF is in these firms, it does add another level of stability to the potentially volatile biotech ETF.
As for returns, the combination of holdings seems to be working for IBB. The fund has returned around 15% annually over the last ten years.
Biotech ETFs to Buy: PowerShares Dynamic Biotechnology &Genome(ETF) (PBE)
Expense Ratio: 0.58%
For investors looking for a tad bit more with regards from their biotech ETFs outside of broad indexing, a smart-beta approach may be best. And the PowerShares Dynamic Biotechnology &Genome(ETF) (NYSEARCA:PBE) could be a top notch choice.
PBE bets on biotech stocks, but not all of them. As a smart-beta fund, it uses screens to weed out all the “bad” stocks, while keeping in all the good biotech firms.
This biotech ETF searches for items such as price momentum, earnings momentum, quality, management action and value to craft its portfolio of biotech stocks. The idea is that by doing this, investors can get better long-term, risk adjusted returns.
PBE only currently holds 30 biotech stocks vs the previously mentioned IBB’s 180. And while, the nature of the smart-beta fund’s screens would have you believe that it’s only a large-cap fund, there is still plenty of small-cap early stage biotech muscle in the ETF. Holdings range from stocks like Biogen Inc (NASDAQ:BIIB) to smaller companies like Ionis Pharmaceuticals Inc (NASDAQ:IONS).
Returns for PBE have been lacking and it has underperformed its benchmark — the S&P Biotech Index. At least on the surface. The key word is risk-adjusted returns. PBE has been less volatile than the broader index.
For investors who need/want growth, but handle the roller-coaster, this is one of the best biotech ETFs to consider.
Biotech ETFs to Buy: ALPS Medical Breakthroughs ETF (SBIO)
Expense Ratio: 0.50%
For really long-term investors, the biotech sector has always been about finding the next big drug or therapy. It’s about finding the biotech stocks that actually have a chance to succeed.
The unfortunate thing is that often ends in heartbreak for the average person. The ALPS Medical Breakthroughs ETF (NYSEARCA:SBIO) helps eliminate much of that heartbreak.
SBIO tracks the Poliwogg Medical Breakthroughs Index. The index will comb through U.S. listed biotech or pharmaceutical companies with one or more drugs in Phase II or Phase III FDA clinical trials. These are the later stage trials and have a greater chance of being approved by the FDA.
While that approval isn’t a guarantee, it certainly takes much of the lotto ticket aspect out of the equation. SBIO’s index will also screen for cash on hand or liquidity. Firms in the ETF must have two years’ worth of cash available at their normal burn rate.
This creates a portfolio of mostly small- and mid-cap biotech firms that have real drugs in development. These are the future leading biotech stocks. The screens help make that a reality rather than just investing based on hope.
However, that hasn’t played out in the biotech ETF’s short life span. Over the last two years, the fund has actually lost money. But much of that loss has come from political pandering. Longer-term, things for SBIO should be rosy.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.